4QFY06 Results Update SECTOR: CEMENT
Shree Cement STOCK INFO.
BLOOMBERG
5 May 2006
BSE Sensex: 12,360 SRCM IN
Buy
REUTERS CODE
S&P CNX: 3,664
Equity Shares (m) 52-Week Range 1,6,12 Rel. Perf. (%)
Rs1,050
Previous Recommendation:Buy
SHCM.BO
34.8
YEAR
NET SALES
PAT
EPS
EPS
P/E
P/ B V
ROE
ROCE
EV/
EV/
END
(RS M)
(RS M)
(RS)
GROWTH (%)
(X)
(X)
( %)
( %)
SALES
EBITDA
2/82/89
03/06A
6,677
1,141
32.7
12.9
32.1
10.4
31.8
24.3
6.2
17.5
36.6
03/07E
10,340
2,586
74.2
126.7
14.1
5.5
47.2
30.1
4.0
10.1
0.8
03/08E
14,340
3,266
93.7
26.3
11.2
3.8
39.8
27.8
2.8
8.2
1,187/322
M.Cap. (Rs b) M.Cap. (US$ b)
?
4QFY06 results were better than our expectation. EBITDA was Rs836m v/s our expectation of Rs779m. Revenues up 38% to Rs2.3b; volumes up 6.9% to 0.93mt owing to production from the new plant. But volume growth was lower v/s our expectation due to late commissioning of the new plant. YoY realization up 29.1% to Rs2,427 per ton. ? Significantly higher realization led to strong EBITDA growth. YoY EBITDA was up 75.8% to Rs836m. YoY EBITDA margin also expanded 798bp, from 29.1% to 37.1%. YoY EBITDA/ton was up Rs353 to Rs900/ton. ? Mega cement capacity expansion announced: proposed to take the current 4.5m ton capacity to 9.1m ton by endFY09. Shree Cement aims to attain volumes of 4.5m ton in FY07, 6.5m ton in FY08 and 9.1m ton in FY09, which would make the company record highest volume growth in the next three years. ? On the expectation of higher-than-estimated realizations, we are upgrading FY07E EPS by 20% to Rs75.1/share. On account of the higher-than-expected FY08 volumes (company guidance has upped from 5.6m ton to 6.5m ton), we are upgrading our FY08 EPS estimate by 62% to Rs93.8/share. Stock is trading at PER of 14.1x FY07E and 11.2x FY08E. Maintain Buy. QUARTERLY PERFORMANCE
(Rs Million)
Y/E MARCH
FY05 1Q
Sales Dispatches (m ton) YoY Change (%) Realization (Rs/ton) YoY Change (%) QoQ Change (%) Net Sales YoY Change (%) Total Expenditure EBITDA Margins (%) Depreciation Interest Other Income PBT before EO Exp Extra-Ord Expense PBT after EO Exp Tax Deferred Tax Rate (%) Reported PAT Adj PAT YoY Change (%) Margins (%) E: MOSt Estimates
0.72 6.3 1,974 15.3 7.7 1,427 22.6 923 504 35.3 111 57 8 344 62 281 22 0 7.8 259 317 139.7 22.2
2Q
0.75 4.7 1,864 15.3 -5.6 1,405 20.7 1,013 392 27.9 111 47 13 247 62 184 14 0 7.8 170 228 423.0 16.2
FY06 3Q
4Q
1Q
2Q
3Q
4Q
0.72 7.7 1,854 13.2 -0.5 1,344 21.9 949 395 29.4 111 47 4 241 62 179 14 0 7.8 165 222 84.5 16.6
0.87 11.9 1,880 2.6 1.4 1,634 14.8 1,158 476 29.1 131 47 15 312 130 182 -26 0 -14.3 208 357 82.3 21.8
0.73 1.0 1,952 -1.1 3.9 1,425 -0.1 982 443 31.1 123 39 3 284 0 284 24 0 8.4 260 260 -18.0 18.2
0.78 3.1 1,998 7.2 2.3 1,554 10.6 1,032 522 33.6 123 33 8 374 0 374 0 0 0.0 374 374 64.2 24.0
0.72 -0.9 2,010 8.4 0.6 1,443 7.4 894 549 38.0 123 33 7 400 112 288 3 0 1.1 284 395 77.8 27.4
0.93 6.9 2,427 29.1 20.8 2,255 38.0 1,419 836 37.1 207 23 17 624 20 604 -3 0 -0.5 607 607 70.2 26.9
Nirbhay Mahawar (Nirbhay@Motilal Oswal.com ); Tel: +91 22 3982 5412
© Motilal Oswal Securities Ltd., 3 Floor, Hoechst House Nariman Point, Mumbai 400 021 Tel: +91 22 39825500 Fax: 2281 6161
FY05
FY06
3.07 8.1 1,895 13.8 13.8 5,821 23.0 4,055 1,766 30.3 526 198 41 1,082 771 311 24 -4 6.6 291 1,010 240.3 17.4
3.15 2.7 2,040 7.6 0.6 6,677 14.7 4,327 2,350 0.4 575 128 35 1,682 1,410 272 29 59 32.2 184 1,141 12.9 17.1
Shree Cement
Firm cement prices drive revenues 38% Revenues for the quarter were up 38% to Rs2.3bn. Realizations were up by 29.1% YoY to Rs2,427 per ton. Sequentially also, realization was higher by 20.8% on account of steep price increases in the northern and central markets.
to Rs836m. EBITDA margin also expanded 798bp YoY from 29.1% to 37.1%. EBITDA per ton moved up by Rs353 YoY to Rs900 per ton — highest in the industry. PER TON ANALYSIS (RS/TON)
Net Realization Raw Material Cost
TREND IN REALIZATIONS
Realization (Rs/ton) - LHS
YoY Grow th (%) - RHS
2,500
39
2,200
28
4QFY06
3QFY06
2QFY06
1QFY06
4QFY05
3QFY05
-16 2QFY05
1,000 1QFY05
-5 4QFY04
1,300 3QFY04
6
2QFY04
1,600
1QFY04
17
Source: Company/Motilal Oswal Securities
Cement volumes were up 6.9% to 0.93mt on account of production from Shree Cement’s new plant. However, volume growth was lower than our expectation owing to the delayed commissioning of its new plant. TREND IN DISPATCHES
Ditpatches (m ton) - LHS
YoY Grow th (%) - RHS 20
1.0 0.9
10 0.8 0 0.7
4QFY06
3QFY06
2QFY06
1QFY06
4QFY05
3QFY05
2QFY05
1QFY05
4QFY04
3QFY04
2QFY04
-10 1QFY04
0.6
Source: Company/Motilal Oswal Securities
Strong realization growth boosts margins Significant improvement in YoY realizations resulted in strong EBITDA growth, which moved up by 75.8% YoY 5 May 2006
4QFY05
YOY (%)
3QFY06
2,427 106
QOQ(%)
1,880
29.1
2,010
20.8
284
-62.7
209
-49.3
Staff Cost
110
116
-5.1
111
-0.6
Power & Fuel
513
434
18.1
403
27.5
Freight & Selling Exp
425
321
32.4
329
29.3
Other Exp
373
177
110.5
195
91.3
Total Exp
1,527
1,332
14.6
1,246
22.6
900
547
64.5
764
17.9
37.1
29.1
EBITDA
1,900
4QFY06
EBITDA Margin (%)
38.0
Source: Company/Motilal Oswal Securities
FY06 PAT lower on account of extraordinary items For the full year FY06, the company has provisioned for extraordinary expenses up to Rs1.41b. This includes additional depreciation of Rs1.1b to align the written-downvalue of the fixed asset in their books with the writtendown-value as per the Income Tax department; Rs212.3m as preoperative expense and Rs112.4m on account of repairs and maintenance. After taking into consideration these extraordinary items, reported PAT for FY06 stood at Rs184m (63% lower YoY). However, adjusted profit for the full year FY06 moved up by 12.9% to Rs1.1b. Capacity increases announced up to 9.1m ton to end-FY09 The company has announced a mega expansion plan, which proposes to increase cement capacity from the current 4.5m ton to 9.1m ton by end-FY09. On account of the substantial increase in capacity, Shree Cement aims to achieve production volumes of 4.5m ton in FY07, 6.5m ton in FY08 and 9.1m ton in FY09. If achieved, this would mean that the company will have the highest volume growth in the next three years. Additional capex incurred will be Rs7b for setting up the following: 1.5m ton clinker capacity, 2m ton grinding capacity and a 38mW power plant.
2
Shree Cement
Upgrading FY07 and FY08 EPS to factor in higher cement prices We note that cement prices countrywide have shot up to levels higher versus our expectation. In line with the higher cement prices, we are upgrading Shree Cement’s FY07 EPS estimate by 20% to Rs75.1 per share. Underpinning our upgrade is the company’s stated capacity expansion plan, which potentially offers higher volume growth visibility for FY08. We have hence changed our FY08 volume estimate from 5.6m ton to 6.5m ton. On account of expected higher realization and higher volume, we are upgrading our FY08 EPS estimate by 62% to Rs93.8 per share.
5 May 2006
Valuation and view The northern and central Indian regions are two areas currently in a cyclical upturn — i.e. witnessing short-term deficits in these markets. We believe that Shree Cement, with 86% of its sales arising from northern India and the remainder resulting from central India, is suitably placed to benefit from any upturn in the cement cycle. Operating cost for the company is one of the lowest in industry, and the higher volumes and realizations would have a multiplier effect on its earnings. We believe Shree Cement, with its aggressive expansion plans, will have the highest volume growth compared with peers, for next three years going forward. The stock is trading at EV/EBITDA of 8.2x FY08E and PER of 11.2x FY08E. We maintain Buy.
3
Shree Cement
Shree Cement: an investment profile Company description Shree Cement is the largest single-location integrated cement plant in northern India with an installed capacity of 4.5 ton. It is strategically located in central Rajasthan from which location it can cater to the entire Rajasthan market as well as Delhi and Haryana economically in both operational scale and logistics. It is a significant player in Rajasthan (28.3% of volumes), Haryana (22.6% of volumes), Delhi (21.9% of volumes) and Punjab (12.6% of volumes). Over the years, it has established a reputation as one of the world’s most efficient cement manufacturers. Key investment arguments ? One of the most cost efficient cement producers in the country. ? Highest volume growth for next three years. ? Best positioned geographically (86% volumes from the north and 14% from central India) to benefit from current tightening of supply-demand and consequent upturn in cement prices. ? Best positioned to cater to demand growth, with its new 1.2m ton integrated plant.
Valuation and view ? The stock trades at 11.2x FY08E EPS and 8.2x EV/ EBITDA FY08E. ? We recommend Buy with a target price of Rs1,313 (~14x FY08E EPS). Sector view ? Volume expected to grow by 8% driven by continuous momentum in housing and infrastructure projects. ? Improved supply-demand dynamics due to limited capacity addition in previous years. However greenfield capacity addition can disturb the tight supply-demand scenario envisaged by us.
EPS: MOST FORECAST VS CONSENSUS (RS)
COMPARATIVE VALUATIONS SHREE CEMENT
P/E (x)
Key investment risks ? Being a single location plant, it is overly dependent on the northern region; any downturn in prices in the northern market would adversely impact the company’s profitability. ? Increase in pet coke prices would impact profitability, as Shree uses pet coke as feedstock for its captive power plant as well as for its fire kiln.
FY07E
14.1
GACL
24.7
27.7
FY08E
11.2
21.0
27.6
FY07
P/BV (x)
FY07E
5.5
6.7
7.3
FY08
FY08E
3.8
5.6
6.1
EV/Sales (x)
FY07E
4.0
4.6
2.8
FY08E
2.8
3.9
2.7
FY07E
10.1
14.4
13.2
FY08E
8.2
11.7
12.8
EV/EBITDA (x)
MOST
CONSENSUS
FORECAST
FORECAST
(%)
74.2
57.0
30.1
93.7
63.0
48.7
RECO.
CEMCO
VARIATION
TARGET PRICE AND RECOMMENDATION CURRENT PRICE (RS)
TARGET
UPSIDE
PRICE (RS)
(%)
1,313
25.0
1,050
Buy
STOCK PERFORMANCE (1 YEAR)
1,300
Shree Cement (Rs) - LHS
Rel. to Sensex (%) - RHS 170
1,050
120
SHAREHOLDING PATTERN (%)
Promoters Domestic Institutions
MAR.06
DEC.05
MAR.05
63.7
63.7
63.7
9.6
11.7
9.7
FIIs/FDIs
15.3
13.8
14.8
Others
11.4
10.8
11.8
5 May 2006
800
70
550
20
300 May-05
Aug-05
Oct-05
Jan-06
-30 May-06
4
Shree Cement
I N C O M E S T A T E M ENT
(Rs Million)
RATIOS
Y/E MARCH
2004
2005
2006
2007E
2008E
Y/E MARCH
Gross Sales
5,859
7,030
7,964
12,174
17,000
Basic (Rs)
Less: Excise Duty Net Sales Change (%)
1,127 4,732 3.9
1,209
1,287
5,821
6,677
10,340
14,340
14.7
54.9
38.7
23.0
1,834
2,660
2004
2005
2006E
2007E
2008E
EPS
8.5
29.0
32.7
74.2
93.7
Cash EPS
21.6
44.1
49.2
95.7
119.6
BV/Share
97.6
101.3
100.9
191.7
279.7
3.0
4.0
5.0
5.0
5.0
90.5
54.7
107.8
7.7
6.1
P/E
36.2
32.1
14.1
11.2
Cash P/E
23.8
21.3
11.0
8.8
P/BV
10.4
10.4
5.5
3.8
6.8
6.2
4.0
2.8
22.3
17.5
10.1
8.2
EV/ton (US$-Cap)
314
229
228
227
Dividend Yield (%)
0.4
0.5
0.5
0.5
DPS
Total Expenditure
3,422
4,055
4,327
6,288
9,384
% of Sales
72.3
69.7
64.8
60.8
65.4
1,3 10
1,766
2,350
4,051
4,956
27.7
30.3
35.2
39.2
34.6
EBITDA M argin (%) Depriciation EBIT Int. and Finance Charges Other Income - Rec. P B T before EO Expense
457 853 387 29 494
526
575
1,240
1,775
198 41 1,082
128 35 1,682
748 3,303 301 40 3,042
900 4,056 332 40 3,764
Extra Ordinary Expense/(Income)
277
771
1,410
0
0
PBT after EO Expense
217
311
272
3,042
3,764
17
24
29
456
499
Current Tax Tax Rate (%)
40.0
6.6
32.2
15.0
13.3
Reported PAT
130
291
184
2,586
3,266
P A T A dj for EO items
297
1,010
1,141
2,586
3,266
12.9
126.7
26.3
1,141
2,586
3,266
Payout (%) Valuation (x)
EV/Sales EV/EBITDA
Return Ratios (%) RoE
12.5
37.4
31.8
47.2
39.8
RoCE
14.8
21.6
24.3
30.1
27.8
0.6
0.8
0.7
0.8
0.9
19
12
22
16
16
Working Capital Ratios
Change (%) Net Profit
35.6 297
240.3 1,010
BALANCE SHEET Y/E MARCH
Equity Share Capital Total Reserves Net Worth Deferred Liabilities Total Loans Capital Employed
2005
2006E
2007E
2008E
348
348
348
348
348
3,052
3,181
3,167
5,554
8,621
2004
3,400
3,529
3,515
5,902
8,970
635
631
690
903
1100
3,494
2,971
4,751
6,501
6,501
7,529
7,131
8,956
13,306
16,571
Gross Block
9,874
9,875
12,660
13,160
15,660
3,835
5,043
5,618
6,366
7,266
Capital WIP Investments Curr. Assets Inventory Account Receivables Cash and Bank Balance Others Curr. Liability & Prov.
Debtor (Days) Inventory (Days)
45
46
27
19
19
Working Capital Turnover (Days)
98
49
77
124
106
1.4
1.0
1.1
1.0
0.7
(Rs Million)
Less: Accum. Deprn. Net Fixed Assets
Asset Turnover (x)
6,039
4,832
7,042
216
1,522
500
3,000
4,000
8
0
0
0
0
1,517
2,014
726
500
1,768 588
6,794
4,226 533
8,394
744
239
481
545
762
76
130
232
2,218
2,370
807
421 739
Debt/Equity
CASH FLOW STATEMENT Y/E MARCH
Oper. Profit/(Loss) before Tax Interest/Dividends Recd. Direct Taxes Paid
(Rs Million) 2004
2005
2006E
1,310
1,766
2,350
4,051
29
41
35
40
40
-87
-21
-87
-456
-499
(Inc)/Dec in WC
-263
CF from Operations
988
(inc)/dec in FA CF from investments
-403
541 2,327
-534 1,763
2007E
-112 3,523
4,956
-513 3,984
-1,395
-3,174
- 1,387
- 3 , 174
-85
-527
1,839
1,963
198
-387
-198
-128
-301
-332
-403
-3,000
2008E
-3,000
-3,500 -3,500
5,173
297
503
Leverage Ratio (x)
799
929
1,297
600
7 13
996
(Inc)/Dec in Debt Interest Paid Dividend Paid CF from Fin. Activity Inc/Dec of Cash
Account Payables
328
502
401
514
718
Add: Beginning Balance
Provisions
175
237
199
199
278
Closing Balance
Net Current Assets
1,265
778
1,414
3,512
4,177
Appl. of Funds
7,529
7,131
8,956
13,306
16,571
-159
-199
-590
-118
-886
1,512
1,463
-333
-4
54
102
1,986
152
81 76
-199
-199
76
130
232
2,218
130
232
2,218
2,370
E: M OSt Estimates
5 May 2006
5
Shree Cement
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Shree Cement No No No
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5 May 2006
6