Shree Cement Ltd - Stock Valuation and Financial Performance

Muted performance ; EBITDA/ton for cement remain flattish QoQ

Shree Cement: Quarterly Result update

Results: Shree Cement reported 48% growth in sales while operating profit grew 45% over same quarter last year. One Jun’19 base, Shree Cement reported 10% growth each

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Key highlights:

• Volume growth was 39% on low base while realization growth was 6.6% year on year and 4.5% over previous quarter.
• Low material costs was offset by energy costs which kept margin at similar levels as last year.
• Debt reduction in previous year lowered the interest costs which led to 78% jump in net profits.

Company generated Rs. 3,100 Cr in free cash flows.

Management Outlook: Shree Cement expects to add new capacities either extension to existing capacities (brownfield) or new ones (Greenfield). Currently the company has new capacities coming in at Pune, West Bengal, Rajasthan and Andhra Pradesh over FY22-25. Shree Cement aspires to grow to 80 Mn tons (MT) capacity by FY2030 from current level of 46MT.

In March 2011 Shree Cements profits had fallen by about 70%, during the previous 4 Quarters ( March 2010-March 2011) earning performance had been under huge pressure. In quarter ending March 2010 the company made a loss of about Rs 71 Crore. The companys profits recovered in June 2010 but were again under pressure in between September 2010-December 2011.

Shree Cement has built a reputation as a Cost leader in Cement space over last decade but this extremely negative performace in a weak cycle compared to other cost leader Ambuja Cement put in to question the sustainability of Shree Cement's cost competitive strategy.

However sharp revival in its profits in March 2012 and over next few quarters since then has reassured us that unlike its positive performance in June 2010 quarter the current revival in performance looks sustainable. Our expectations have been boosted by better than expected demand supply scenario in North India. As a result we are revisiting our guidance for Shree Cement which has resulted in a substantial jump in its profits.

During this period Shree Cement has worked to bring down its net debt position levels. Among the mid tier cement (less than 20MTPA but more that 10 MTPA capaciy) companies it has one of the strongest balance sheet with a net cash position of about 2000 Cr (Dec 2012).

Among large cement player, Shree Cement remains the only exception which is experimenting towards developing a seperate power business. Its experience in runing Captive Power Plants (CPP) gives operational capability in runing a small 300 MW power plant on merchcant power basis. The Power plant is small enough not to dent Shree's profit in a bad quarter and large enough to give it expereince to run a medium size power plant on a merchant power basis. We believe this adds another dimension to Shree's ability and post power sector reforms these qualitative aspects would have to be valued and gives additional upside to a long term investor.

However, the cement market across India remains under demand pressure owing to slowdown in India's Investment climate revival in Infrastructure and real estate markets remains key to a sustainable cement industry performance. We advise caution while investing Shree at current prices and suggest risk averse investor to seek adding Shree around discount price.