Highlights:
- Power business had a strong quarter
- Receding cost pressures drive improvement in margins
- Demand continues to remain solid in most parts- Valuation expensive at 25 times FY19 EV/EBITDA
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Shree Cement delivered yet another quarter of steady financial performance for Q4 of 2018-19. A strong show by the power business, along with solid volume expansion in the cement division, gave shine to the quarterly play.
Key results highlights
- The company reported sales growth of 17 percent and earnings before interest, tax, depreciation and amortisation (EBITDA) increase of 35 percent year-on-year (YoY) as the margins expanded by more than 200 bps. Strong demand from infrastructure and housing segments drove volumes up by 13 percent during January-March. However, higher financing costs and depreciation expenses due to a recently commissioned plant resulted in a subdued bottom line.
- Cement business revenue growth of 15 per cent YoY came largely on the back of higher volumes as realisations continued to remain stable. Power segment revenue, excluding inter-segment sales, surged more than 50 percent, topping Rs 200 crore. Margin for this segment also improved, helped by sales uptick.
- Increasing realisations (up 2 percent) and declining cost pressures (down 3 percent) boosted cement segment profitability for the three months to March. The company reported EBITDA per tonne at Rs 1,102 during the quarter under review, primarily because of a decline in petcoke and diesel prices. Realisations dropped sequentially despite the pan-India cement price hikes during February and March.
- Shree Cement’s foray into the southern market is progressing well. The grinding unit in Karnataka is operating at 30-35 percent capacity utilisation and the company is planning to ramp up utilisation to 60 percent over the next 3-4 quarters.
- On the international front, Union Cement, the UAE-based subsidiary which the company acquired in January 2018, is facing a challenging operating environment due to muted demand conditions in the region. Shree Cement, therefore, has stepped up focus on exports to mitigate the near-term weakness in the local market.
-The capex for FY20 is pegged at Rs 1,500-1,600 crore and will primarily be used for setting up two new plants in Jharkhand and Odisha, which are expected to go on stream in the next 2-3 quarters. Furthermore, the cementmaker is planning a 3 million tonne grinding unit in Pune that will commence operations by Q3 FY21.
- Working capital deteriorated moderately in the last quarter as the trade receivables jumped to Rs 732 crore at the end of Q4 FY19, from Rs 459 crore a year ago. The management attributed the sharp rise to the tight liquidity environment.
Outlook and recommendation
- Large-scale infrastructure projects will pitchfork the cement industry growth to 7-8 percent over the next 12 months. Shree Cement expects to outpace the industry and is targeting a growth of 10-12 percent on the back of expansion in newer markets and regions.
- The company has a strong positioning in northern and western markets and is one of the lowest cost cement producers in the country. Going forward, Shree Cement will have a greater focus on realisations in comparison to volumes. In terms of valuations, the company trades at fairly expensive one of 25 times trailing 12 months enterprise value/EBITDA. The current valuation deters us from buying the stock at current levels and investors, therefore, should wait for an opportune moment to enter the stock.
