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Initiating Coverage

Cement
CMP: Rs. 1,931 Target : Rs. 2,397 Rating : BUY
12th July 2010

Shree Cement Limited


Power neutralizes short term cement cycle downturn

SBICAP Securities Limited

Shree Cement Limited (SCM), the largest player in North India, is one of the most efficient players in Indian cement industry. The company has always commissioned its capacities at opportune time, which is evident by sales volume CAGR of 27.6% against industry average of 9.4% during FY05 to FY10. It has recently diversified its product-mix by entering in merchant power business. We initiate coverage on SCM with a BUY rating and a 12-18 months target price of Rs 2397 (based on FY12E financials), an upside of 24.1% from its CMP. Though, the stock could be under pressure in the short-term due to monsoon & glut situation, however, increase in share of power business profitability (40.9% of EBITDA in FY12E against 7.1% in FY10) would provide a buffer to cement cycle downturn. We initiate coverage on the stock with a BUY rating.
(Rs. mn)

Key Financials

FY09

FY10 FY11E FY12E

Net Sales 26,645 36,321 40,176 47,584 Growth Net Sales (%) 29.0 36.3 10.6 18.4 EBITDA 9,508 14,940 14,492 17,399 EBITDA Margins (%) 35.7 41.1 36.1 36.6 Net Profit 6,089 7,395 7,477 9,377 Net Profit Margin (%) 22.9 20.4 18.6 19.7 Growth Adj Net Profit 96.5 21.5 1.1 25.4 Adjusted EPS (Rs) 174.8 212.3 214.6 269.1
Key Ratios FY09 FY10E FY11E FY12E

Capacity being expanded by 4.5 MT (including 3 MT commissioned during FY10) to 13.6 MT by Q3FY11:SCM is expanding its grinding capacity by 1.5 MT to 13.6 MT by Q3FY11. It has already increased its capacity by 3 MT to 12.1 MT during FY10. The company is also expanding its clinker capacity by 1MT to 8.5 MT by Q2FY11. Increase in the grinding capacity will help the company to lower its clinker sales and thus, improve its productmix and profitability in future. The company sold 0.98 MT of clinker during FY10, which is expected to drop to 0.14 MT during FY11 and nil during FY12. We expect the sales volume of the company to grow at a CAGR of 8.8% for the period FY10-FY12E. Power capacity being expanded by 350 MW to 559 MW by Dec 11:SCM is expanding its power generation capacity by 350 MW to 559 MW by Dec 2011. The company had already commissioned 93 MW of new capacities during FY10, which includes 43 MW Waste Heat Recovery (WHR) capacities where the EBITDA per unit is expected to be in the range of Rs 4- Rs 4.5. Earlier power generation capacity of 116 MW (FY09 end capacity) suffices the internal power requirement of the company and the sales from new power plants (443 MW) will be purely on merchant basis. The company has no plans to enter into a long term Power Purchase Agreement (PPA). Increase in power business share (40.9% of EBITDA in FY12E against 7.1% in FY10) de-risks the cyclicality of cement business: Power business is expected to garner EBITDA of Rs 3 bn (~172% YoY growth) in FY11E and Rs 5 bn (~65% YoY growth) in FY12E against Rs 1.1 bn during FY10. The CAGR over FY10-FY12E is 112%. A sharp increase in power business profits would protect the company from the cyclical nature of cement business. We expect the power business to contribute 16% and 25.7% to the revenues during FY11E and FY12E respectively and 26.6% and 40.9% to EBITDA during the same period. In spite of margins under pressure, SCM is expected to retain its leadership position: SCM is among the most profitable cement company and enjoyed an EBITDA/ tonne of Rs 1354 (for cement business) and an EBITDA margin of 41.1% during FY10. Going forward, we expect the company to retain its leadership position and garner EBITDA/ tonne of Rs 1037 and Rs 1009 (for cement business) and EBITDA margins of 36.1% and 36.6% during FY11E and FY12E respectively. Outlook & Valuation: At the CMP of Rs 1931, SCM is trading at 9x FY11E and 7.2x FY12E EPS of Rs 214.6 and Rs 269.1 respectively. On EV/EBITDA basis, it is trading at 4.8x FY11E & 3.3x FY12E respectively and on EV/Tonne basis at; USD 110.8 FY11E and USD 92.1 FY12E respectively. The company has healthy Balance sheet with FY12E net cash balance of Rs 9.7 bn. The average EV/EBITDA over the last 9 years is 4.6x. We value the company on SOTP method, which gives us a 12-18 months target price of Rs 2397, an upside of 24.1% from its CMP. We initiate coverage on the stock with a BUY rating. Our call includes impact of power share in the business.
Sanjeev Kumar Singh Securities Research, Tel: 91-22-30273324 Email: sanjeev.singh@sbicapsec.com

P/E (x) P/BV (x) EV/ EBITDA (x) EV/ Sales (x) BVPS (Rs) RoCE (%) RoE (%)
Key Data

10.9 5.6 7.3 2.6 347.3 31.8 64.7

9.1 3.5 4.7 1.9 547.9 28.2 47.4

9.0 7.2 2.6 1.9 4.8 3.3 1.7 1.2 750.9 1,003.6 21.3 21.6 33.1 30.7

Face Value (Rs) Shares O/S (mn) Market Cap (Rs bn) 52-Week Range(H/L) 1-Year Avg Vol Nifty Reuters Code Bloomberg Code Year End

10 34.8 67.3 2,454/1,102 23,836 5,383 SHCM.BO SRCM IN Mar

Shareholding Pattern (%)


Public & Others Foreign Institutions Corporate Holding Promoters 5% 16% 9% 5% 65%

June 10

Relative Price Performance


220 180 140 100 60 Jun-09 Sep-09 Dec-09 Mar-10 Nifty Jun-10

Shree Cement

Institutional Equities

SBICAP Securities Limited 191, Maker Tower F , Cuffe Parade Mumbai 400005, India Email: sbicapresearch@sbicapsec.com
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SBICAP Securities Limited

Shree Cement Ltd

Table of Contents
COMPANY OVERVIEW ............................................................................................................ 3

KEY ASSUMPTIONS ................................................................................................................. 5

INVESTMENT CASE ................................................................................................................. 8

KEY RISKS & CONCERNS ................................................................................................... 11

OUTLOOK & VALUATION .................................................................................................. 12

KEY FINANCIALS ANALYSIS ............................................................................................. 13

FINANCIAL STATEMENTS .................................................................................................. 16

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Shree Cement Ltd

SBICAP Securities Limited

COMPANY OVERVIEW
Shree Cement, one of the largest producers of cement in Rajasthan, was incorporated in 1979 by Kolkata based industrialists Mr P D Bangur and Mr B G Bangur. The company started its operations in 1985 with a total production capacity of 0.6 MTPA which has been increased to 12.1 MTPA as on date. The company further plans to increase its production capacity to 13.6 MTPA by the end of Q3FY11E. SCM is the largest cement producer in North India and is ranked among the top five cement manufacturing groups in the country. It is one of the most profitable cement companies in India and enjoys one of the highest EBITDA margins. The company has also been rated as amongst Top 20 best employers in the country according to a survey conducted by Business Today magazine along with Mercer- TNS. It is the only cement company which finds a place in this list. SCL is being run under the leadership of Mr B G Bangur who has a long experience in the industry. He is also the director in Didwana Industrial Corporation Ltd, NBI Industrial Finance Com. Ltd, Shree Capital Services Ltd, Khemka Properties Pvt Ltd and Digvijay Finlease Ltd. Mr H M Bangur, the Managing Director of the company is a Chemical Engineer from IIT Mumbai and brings technical insight to the Board which is the driving force of the technical excellence achieved by the company. He has been elected as the Vice President of Cement Manufacturers' Association (CMA). He is the ex-president of the Bharat Chamber of Commerce and Industry. Product Profile of SCM SCL's multi-brand portfolio consists of both OPC and PPC suh as Shree Ultra Ordinary Portland Cement, Shree Ultra Jung Rodhak, Bangur Cement and Tuff Cemento 3556. Shree Cement is one of the most preferred brands in its marketing area. Production Capacity & Plants Break-up Units
Unit-I Unit-II Unit-III Unit-IV Unit-V Unit-VI Unit-VII Unit-VIII Unit-IXE (Q3FY11E)

Location
Beawer, Rajasthan Beawer, Rajasthan Raas, Rajasthan Raas, Rajasthan Raas, Rajasthan Raas, Rajasthan Suratgarh, Rajasthan Roorkee, Uttarakhand Jaipur

Production Capacity (MTPA)


1 2.1 1.5 1.5 1.5 1.5 1.5 1.5 1.5 13.6

Total Capacity Source: Company, SBICAP Securities Research

The company has installed 209 MW (including 116 MW, which ensures self-sufficiency of internal power requirements) of Captive power plants (CPPs) at Beaver and Raas, Rajasthan. The company is expanding its power generation capacity to 559 MW by Dec 2011 in different stages. The extra power generated through new power plants (443 MW) would be sold on a merchant basis. Securities Research
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Shree Cement Ltd Sales mix of SCM SCM has a fairly diversified sales mix with ~73% of its sales volume arising from North India and ~27% of volume from Central markets (Western UP & MP). Region-wise Sales Mix
MP 6% J&K 0.3% Uttaranchal 5% Punjab 7% Rajasthan 26% Others 1.7%

Western UP 21%

Delhi 13%

Haryana 20%
Source: Company, SBICAP Securities Research

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Shree Cement Ltd

SBICAP Securities Limited

KEY ASSUMPTIONS
Volume & Realization Assumptions

Sales volume is expected to grow by 6.7% and 10.8% to 11.04 MT


and 12.24 MT during FY11E and FY12E respectively. The CAGR over FY10 to FY12E is expected to be 8.8%.

Average net realization per bag of cement is expected to be Rs 156.8


(6.1% YoY decline) and Rs 154.7 (1.3% YoY decline) during FY11E and FY12E respectively as compared to Rs 167 during FY10.

Revenues are expected to grow by 10.6% and 18.4% to Rs 40.2 bn


and Rs 47.6 bn during FY11E and FY12E respectively. The CAGR over FY10- FY12E is expected to be 14.5%.

EBITDA of the company is expected to decline by 3% to Rs 14.5 bn


during FY11E; however, we are expecting an increase of 20.1% to Rs 17.4 bn during FY12E. The CAGR over FY10-FY12E is expected to be 7.9%.

Adjusted profit of the company is expected to grow by 1.1% to Rs


7.5 bn and 25.4% to Rs 9.4 bn during FY11E and FY12E respectively. The CAGR over FY10-FY12E is expected to be 12.6%. Snapshot:- Volume & Realization Particulars Capacity (MTPA) (at the end) Capacity at the beginning (MTPA) Sales Volume (MTPA) Avg Realization per bag (Rs) Capacity Utilization (%)
Source : Company, SBICAP Securities Research

FY11E 13.6 12.1 11.04 156.8 88.5

% Change 12.4 33.0 6.7 -6.1

FY12E 13.6 13.6 12.24 154.7 91 FY11E


315.9 708.6 144.9 368.5

% Change 0 12 10.8 -1.3

Cost Assumptions (Rs per Tonne)


Raw Materials Freight Cost Staff Cost Other Expenses
Source: SBICAP Securities Research

FY12E
328.0 712.0 925.3 158.9 353.5

Power & Fuel Cost (including coal for power plants) 787.5

Increasing Volume to offset the Realization decline


14 11 170 164 158 152 146 FY08 FY09 Volume FY10 FY11E FY12E Net Realization per Bag (Rs)

7 4 0

Source: Company, SBICAP Securities Research

Securities Research

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Rs / Bag

MT

SBICAP Securities Limited

Shree Cement Ltd

Power sales volume is expected to grow by 280% YoY to 1008 mn units and 61% YoY to 1944 mn units during FY11E and FY12E respectively. Average merchant power tariff is expected to be Rs 5.5 (15.4% YoY decline) and Rs 5 (10% YoY decline) during FY11E and FY12E respectively against Rs 6.5 during FY10. EBITDA from Power division is expected to increase by 171.8% YoY to Rs 3012 mn and 65.4% YoY to Rs 4984 mn during FY11E and FY12E respctively. Power divisions EBITDA margin is expected to decline by 895 bps YoY to 54.3% and 296 bps YoY to 51.3% during FY11E and FY12E respectively.

Power business assumptions Particulars Sales (Mn units) Average Tariff Rs/unit Revenue (Rs Mn) % Change YoY Total Operating Expenditure (Rs Mn) EBIDTA (Rs Mn) % Change YoY EBIDTA Margins (%) EBIDTA/ Unit Rs
Source : Company, SBICAP Securities Research

FY11E 1,008 5.5 5,544 213.3 2,531 3,012 171.8 54.3 2.99

FY12E 1,944 5.0 9,720 75.3 4,736 4,984 65.4 51.3 2.56

FY13E 3,133 4.5 14,100 31.9 7,921 6,180 24.0 43.8 1.97

FY14E 3,203 4.5 14,411 2.2 8,700 5,712 -7.6 39.6 1.78

Expect a decline in merchant power tariffs


7.0 6.4 Rs / Unit 5.8 5.2 4.6 4.0 5.5 5.0 4.5 FY10 FY11E FY12E FY13E 4.5 FY14E 6.5

Source: Company, SBICAP Securities Research

SCM sells power to Rajasthan State Electricity Board, power intermediaries like Reliance Power and Tata Energy and Indian Energy Exchange (IEX). Generally, the company has 1 year contract with Rajasthan State Electricity Board, 1 month contract with power intermediaries while realization at IEX varies on a daily basis. During FY10, 65% of power units was sold to Rajasthan State Electricity Board at a rate of Rs 6.3/ kwh, 35% was sold through power intermediaries at a rate of Rs 6-7/ kwh and 5% was sold through IEX at an average rate of Rs 5.2/ kwh. Higher power sales to Rajasthan State Electricity Board and power intermediaries at a higher rate (20-25% premium to

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Shree Cement Ltd

SBICAP Securities Limited average IEX rate) translated into an average realization of Rs 6.5/ kwh during FY10.

Power Sales Break-up FY10 Buyers Rajasthan State Electricity Board Power Intermediaries IEX
Source : Company, IEX, SBICAP Securities Research

% of Power Sales 65% 35% 5%

Price/kwh (Rs) 6.3 6.0-7.0 5.2

Contract Period 1 year 1 month Daily Variation

During Q1FY11E, the management expects to sell 53% of power to Rajasthan State Electricity Board at Rs 6.42/ kwh and 47% to power intermediaries at Rs 6.32/ kwh. Power Sales Break-up Q1FY11E
60 45 6.42 6.32 7.2 6.4 5.6 47 4.8 4 Rajasthan State Electricity Board % of Power Sales
Source: Company, SBICAP Securities Research

30 15 0

53

Power Intermediaries Price/kwh (Rs)

Securities Research

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Rs/kwh

(%)

SBICAP Securities Limited

Shree Cement Ltd

INVESTMENT CASE
Capex Plan to boost the sales volumes and maintain the market share SCM planned a Capex of Rs 26 bn for increasing its cement production capacity from 9.1 MTPA to 13.6 MTPA, setting up a 1 MTPA clinkerization unit and installation of captive power plants of 443 MW generation capacity. Out of the planned capex of Rs 26 bn, Rs 7.4 bn was to be spent on the cement division.

. The company expanded its capacity by 3 MT to 12.1 MT during FY10 and plans to increase it to 13.6 MT by Q3FY11E. Particulars
Grinding Unit of 1.5 MTPA at Roorkee (Uttarakhand) Grinding Unit of 1.5 MTPA at Suratgarh (Rajasthan) Grinding Unit of 1.5 MTPA at Jaipur (Rajasthan) Clinkerization Unit of 1 MTPA
Source: Company, SBICAP Securities Research

Completion Schedule
Q4FY10 Q4FY10 Q3FY11E Q2FY11E

Project Cost (Rs Mn)


2000 1700 1700 2000

Increase in grinding capacity would help the company to reduce clinker sales and in turn, improve its product-mix. The company sold 0.98 MT of clinker during FY10. Going forward, we expect clinker sales to decline to 0.14 MT and nil during FY11E and FY12E respectively. It is to be noted here that clinker realizations are usually 30%-40% lower than cement realizations. Increase in grinding capacity will help the company to improve its product-mix and profitability in future. Capacity augmentation is expected to result in a sales volume CAGR of 8.8% for the period FY10-FY12E. However, Expected volume growth of 8.8% during FY10-FY12E is far below the 27.6% volume CAGR recorded during FY05-FY10. Increased capacity would help SCM to retain its market share in North India (18-19%) , however, we expect a decline in Pan-India share (4.3% in FY12E against 4.5% in FY10). Stability in North Indian market share expected
20 19 18
(%) (%)

Expect a decline in Pan-India market share


4.8

19 4.6 4.4 18 18 4.3 4.0 4.0 4.5 4.3

17

17

15 FY08 FY09 FY10 FY11E FY12E North India Mkt Share


Source: Company, Industry, SBICAP Securities Research

3.6 FY08 FY09 FY10 FY11E FY12E Pan-India Mkt Share

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Shree Cement Ltd

SBICAP Securities Limited Power plant to protect from cyclicality of cement business SCM planned a capex of Rs 18.5 bn to increase its Captive Power Plant (CPPs) capacity by 443 MW (including 93 MW commissioned during FY10) to 559 MW which would be carried out in different phases by the end of Q3FY12E. Particulars
43 MW WHR at Raas, Rajasthan 50 MW, Thermal Power Plant I (Raas, Rajasthan) 50 MW, Thermal Power Plant II (Raas, Rajasthan) 150 MW, Thermal Power Plant III (Beawar, Rajasthan) 150 MW, Thermal Power Plant IV (Beawar, Rajasthan)
Source: Company, SBICAP Securities Research

Expected Completion Time


Q4FY10 Q3FY10 Q1FY11 Q2FY12E Q3FY12E

Project Cost (Rs Mn)


2,500 2,000 2,000 6,000 6,000

Power generated through new CPPs (443 MW) would be sold on spot basis (merchant tariff) and the company has no plans to enter into a long term Power Purchase Agreement (PPA). This will lead to improved performance parameters as spot rates typically range from Rs 4.5- Rs 6/ unit as compared to Rs 2.75- Rs 3.5/ unit if sold to other State Electricity Boards (SEBs). SCM is expected to sell 1008 mn units and 1944 mn units of power during FY11E and FY12E respectively, which would contribute Rs 3012mn and Rs 4984 mn to EBITDA. We expect the power business to contribute 16% and 25.7% to the revenues during FY11E and FY12E respectively and 26.6% and 40.9% to EBITDA during the same period.

Power EBITDA share expected to jump (40.9% in FY12E against 7.1% in FY10) Revenue Break- up (%)
100 75
(%)
(%)

EBITDA Break- up (%)


100
16.0 25.7

4.9

7.1 26.6 40.9

75
95.1

50 25 0

50 25 0
FY10

84.0

92.9 73.4 59.1

74.3

FY10 Cement

FY11E Power

FY12E

FY11E Cement Power

FY12E

Source : Company, SBICAP Securities Research

Power EBITDA share is expected to jump (40.9% in FY12E against 7.1% in FY10) more than increase in revenue share (25.7% in FY12E against 4.9% in FY10), which, would de-risk the company from cyclicality of cement business for next 2 years, till the time cement cycle turns positive. We expect the power sales of the company to increase by 7.3x between FY10-FY12E and 11.8x between FY10-FY13E. Power sales of the company is expected to increase to ~3.1 bn units by FY13E against 265 mn units during FY10.

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SBICAP Securities Limited Accelerating Power Sales Volume


3,200

Shree Cement Ltd

3,133 2,200 1,944 1,200 1,008 265 200 FY10 FY11E FY12E FY13E

Source: Company, SBICAP Securities Research

Amongst the most profitable companies in its peer group SCM is the most profitable cement company amongst its peer group and enjoyed an EBITDA per tonne of Rs 1354 (for cement business) and an EBITDA margin of 41.1% during FY10. Going forward, we expect the company to retain its leadership position and garner EBITDA per tonne of Rs 1037 and Rs 1009 (for cement business) and EBITDA margins of 36.1% and 36.6% during FY11E and FY12E respectively. SCM's low cost of production is mainly due to its captive power and dependence on pet coke. The company uses pet-coke to fire its kiln as well as to procure energy from captive plants. Benefits of Pet Coke SCM uses pet coke as a fuel for its cement and captive power plants. Petcoke is a low-value residue produced while refining crude oil and is used for producing fuels such as diesel and naphtha. Petcoke has a very high calorific value of more than 8000 kcal/kg, high sulphur content and low volatile matter which make it difficult to burn. The price of petcoke is determined on its calorific value and it proves to be a cheaper option than coal as it has more calorific value, and contains less volatile matters and ash. As cement kilns are able to fire a wide range of fuels it is possible to burn up to 100% petroleum coke in them. Cement EBITDA Margin (%):- SCM vs. Peer Companies
45 39

Mn Units

EBITDA/ Tonne: - SCM vs. Peer Companies


1,600

33 27 21 FY08 FY09 FY10 FY11E Peer Companies EBITDA M (%) SCM EBITDA M(%)

Rs/Tonne

1,300

(%)

1,000

700 FY08 FY09 FY10 FY11E Peer Companies EBITDA/ Tonne SCM EBITDA/Tonne

Source: Company, SBICAP Securities Research

10

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Shree Cement Ltd

SBICAP Securities Limited

KEY RISKS & CONCERNS


Delay in cement capex plans Any delay in the cement capex plans of the company would have a negative impact on our assumptions of total sales volume and profitability of the company which will result in lower than estimated profits. Delay in commissioning of Captive Power Plants Any delay in the commissioning of captive power plans of the company would have a negative impact on our assumptions of total revenues and profitability of the company which will result in lower than estimated profits. Decline in cement prices We have anticipated average net realization of cement for SCM to decline by 6.1% and 1.3% during FY11E and FY12E respectively for our assumptions. Any decline in prices greater than our assumption will have a negative impact on our expected topline and bottomline of the company. Decline in merchant power tariffs We have anticipated average merchant power tariff to be Rs 5.5 (15.4% YoY decline) and Rs 5 (10% YoY decline) during FY11E and FY12E respectively against Rs 6.5 during FY10. Any decline in merchant power tariff higher than our assumption will have a negative impact on our expected topline and bottomline of the company. Slowdown in infrastructure and construction activities Housing sector accounts for around 60-65% of total cement consumption while infrastructure activities account for around 20-25% of total consumption. Any slowdown in the economy will affect the construction and infrastructure activities, which could cool off the total demand for cement. Government regulations From the beginning of 2007, cement industry has witnessed a number of government interventions such as removal of countervailing duty and additional excise duty, reduction of import duty on cement to nil from 12.5%, dual excise structure and price freeze. Even though, a 4% excise cut was announced by the Government as a part of stimulus package to boost the overall economy, we feel that it will be rolled back after sometime (2% has already been rolled back during Union Budget 2010). Any move by the government to control the sector would hamper the performance of cement companies.

Securities Research

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11

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Shree Cement Ltd

OUTLOOK & VALUATION


At the CMP of Rs 1931, SCM is trading at 9x FY11E and 7.2x FY12E EPS of Rs 214.6 and Rs 269.1 respectively. On EV/EBITDA basis, it is trading at 4.8x FY11E & 3.3x FY12E respectively and on EV/Tonne basis at; USD 110.8 FY11E and USD 92.1 FY12E respectively. The company has healthy balance sheet with FY12E net cash balance of Rs 9.7 bn. The average EV/EBITDA over the last 9 years is 4.6x. We value the company on SOTP method, which gives us a 12-18 months target price of Rs 2397, an upside of 24.1% from its CMP. We initiate coverage on the stock with a BUY rating. Our call includes the impact of power share in the business. Particulars (Rs Mn) EV Cement EV Power : 143 MW (1.5x Equity) EV Power : 300 MW (1x Equity) Total EV Less: Net Debt Equity Value No of Eq shares Target Price CMP % Upside
Source: Company, SBICAP Securities Research

FY11E 57240 9750 8500 75490 2012 73479 34.84 2109 1931 9.2%

FY12E 55571 9750 8500 73821 -9697 83518 34.84 2397 1931 24.1%

1 yr forward P/E Band


120 90 60 30 0 Apr-01 Oct-02 Apr-04 Nov-05 May-07 Dec-08 P/E Mean Median 8.0 6.0 4.0 2.0

1 yr forward EV/EBITDA Band

Jun-10

0.0 Apr-01 Oct-02 Apr-04 Oct-05 Apr-07 Oct-08 Apr-10 Rolling EV/EBITDA Mean Median

Source : Capitaline, Company, SBICAP Securities Research

12

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Shree Cement Ltd

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KEY FINANCIALS ANALYSIS


Revenues of the company are estimated to grow by 10.6% and 18.4% to Rs 40.2 bn and Rs 47.6 bn in FY11E and FY12E respectively. The CAGR over FY10 to FY12E is likely to be 14.5%. EBITDA of the company increased by 57.1% to Rs 14.9 bn in FY10, however, we expect a decline of 3% to Rs 14.5 bn in FY11E due to our assumption of an estimated 6.1% YoY decline in cement prices during the same period. We expect EBITDA to show a growth of 20.1% to 17.4 bn during FY12E due to increased contribution from power segment (40.9% of EBIDTA against 26.6% in FY11E) and realizations improvement. The CAGR over FY10 to FY12E is likely to be 7.9%. EBITDA margins of the company improved by 545 bps to 41.1% in FY10; however, we expect a decline of 506 bps to 36.1% during FY11E due to our expectation of decline in realization, capacity utilization rates and merchant power tariffs. We expect 49 bps improvement in EBITDA margins to 36.6% during FY12E. Adjusted profit of the company increased by 21.5% in FY10 to Rs 7.4 bn. Going forward, we expect an increase of 1.1% YoY to Rs 7.5 bn and 25.4% YoY to Rs 9.4 bn during FY11E and FY12E respectively. The CAGR over FY10 to FY12E is likely to be 12.6%. Adjusted profit margins of the company declined by 249 bps to 20.4% in FY10; however, we expect a decline of 175 bps to 18.6% during FY11E. However, we expect the adjusted profit margins to improve by 109 bps to 19.7% during FY12E. Snapshot- Key Parameters
50,000 37,500
Rs mn

25,000 12,500 0

FY08

FY09 Revenues

FY10 EBITDA

FY11E Adj PAT

FY12E

Source: Company, SBICAP Securities Research

EBITDA per tonne of cement increased to Rs 1354 in FY10 as compared to Rs 1117 in FY09, mainly due to 8% improvement in realization per tonne. Going forward, we expect the EBITDA per tonne of cement to be Rs 1037 during FY11E and Rs 1009 during FY12E. EBITDA/ Tonne is expected to decline
1,430 1,310 1,361 1,354

(Rs mn)

1,190 1,070 950 1,117 1,037 FY08 FY09 FY10 FY11E FY12E 1,009

EBITDA per tonne (Cement)


Source: Company, SBICAP Securities Research

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SBICAP Securities Limited

Shree Cement Ltd EBITDA margins of the company improved by 545 bps in FY10 to 41.1% from 35.7% in FY09 on account of ~8% YoY increase in blended realizations per tonne and contribution from power sales. Going forward, we expect a decline of 506 bps to 36.1% during FY11E due to an expected 6.1% YoY decline in realizations. However, we expect the EBITDA margins to improve by 49 bps to 36.6% in FY12E due to increased contribution from power segment and improvement in realizations. EBIT margins of the company declined by 255 bps to 25.4% in FY10 from 28% in FY09, driven by a 177.7% YoY decline in depreciation expenses. Going forward, we expect the EBIT margins to be 22.5% in FY11E. However, We expect the EBIT margins to improve by 14 bps to 22.7% in FY12E. Adjusted profit margins of the company declined by 249 bps to 20.4% in FY10 from 22.9% in FY09 mainly on account of 137 bps increase in tax rates to 20.6% against 19.2% in FY09. Going forward, we expect the adjusted profit margins to decline by 175 bps to 18.6% during FY11E. However, we expect the adjusted profit margins to improve by 109 bps to 19.7% during FY12E. Margins to stabilize post FY11
45 36 41.7 35.7 28.0 27 18.6 18 15.0 9 FY08 FY09 FY10 EBIT Margin (%) FY11E FY12E Adj. PAT M (%) EBITDA M (%) 22.9 41.1 36.1 36.6

(%)

25.4

22.5 18.6

22.7 19.7

20.4

Source: Company, SBICAP Securities Research

RoE & RoCE Return on Equity (RoE) of the company improved by 1201 bps to 64.7% in FY09 from 52.7% in FY08 on account of improvement in adjusted profit margins of the company from 15% in FY08 to 22.9% in FY09. Going forward, we expect the RoE to decline by 1726 bps to 47.4% in FY10E and further, by 1437 bps to 33.1% in FY11E. The sharp decline in RoE during FY11E can be attributed to a decline in profit margins mainly due to decline in realizations. We expect the RoE to be 30.7% during FY12E. RoCE of the company improved by 939 bps to 31.8% in FY09 compared to 22.5% during FY08 on account of improvement in EBIT margins from 18.6% in FY08 to 28% in FY09. Going forward, we expect he RoCE to decline by 363 bps and 694 bps to 28.2% and 21.3% during FY10E and FY11E respectively. RoCE is further expected to improve by 31 bps to 21.6% in FY12E.

14

Please refer to our disclaimer given at the back cover page

Securities Research

Shree Cement Ltd RoE & RoCE are expected to decline


70 54 52.7 64.7 47.4

SBICAP Securities Limited

(%)

38 22 6 31.8 22.5 FY08 FY09 RoE (%) 28.2

33.1

30.7 21.6 FY12E

21.3 FY11E RoCE (%)

FY10E

Source: Company, SBICAP Securities Research

Net Debt /Equity of the company declined from 1.05x in FY07 to 0.15x in FY09 due to strong cash flows. Going forward, we expect the Net debt/equity of the company to rationalize to the levels of 0.12x and 0.08x in FY10E and FY11E respectively. However, we expect the company to turn into a net cash surplus entity in FY12 which would bring down the Net Debt/Equity to the levels of -0.28x. Improvement in Net Debt/ Equity
1.20 0.80
(x)

1.05

0.40 0.00 FY07 -0.40

0.40 0.15 FY08 FY09 0.12 FY10E 0.08 FY11E -0.28 Net Debt/ Equity (x)

Source: Company, SBICAP Securities Research

Securities Research

Please refer to our disclaimer given at the back cover page

15

SBICAP Securities Limited

Shree Cement Ltd

FINANCIAL STATEMENTS
Income Statement Year Ending in March Net Sales Total Expenditure Raw Materials Power & Fuel Staff Cost Transport & forwarding exp Others EBITDA EBITDA margin (%) Other Income Depreciation Interest PBT PBT margin (%) Tax Adj PAT PAT margin (%) Diluted EPS (Rs)
Source: Company, SBICAP Securities Research (Rs mn)

FY09 26,645 17,137 4,152 6,058 1,039 4,294 1,498 9,508 35.7 829 2,054 744 7,538 28.3 1,449 6,089 22.9 174.8

FY10 36,321 21,381 3,238 6,105 1,586 6,653 3,996 14,940 41.1 1,004 5,704 926 9,313 25.6 1,918 7,395 20.4 212.3

FY11E 40,176 25,683 3,489 8,698 1,601 7,826 4,070 14,492 36.1 1,200 5,440 904 9,347 23.3 1,870 7,477 18.6 214.6

FY12E 47,584 30,185 4,014 11,325 1,945 8,715 4,185 17,399 36.6 1,562 6,610 915 11,435 24.0 2,058 9,377 19.7 269.1
(Rs mn)

Balance Sheet Year Ending in March Sources of Funds: Share Capital Reserves Shareholders Fund Debt Net deferred tax Total Liabilities Application of Funds: Gross Block Accumulated Depn Net Fixed Assets Capital WIP Investments Current Assets Inventories Sundry Debtors Cash & Bank balances Loans & Advances Total Current Assets Sundry creditors Other liabilities & provisions Total Current Liabilities Net Current Assets Total Assets

FY09 348 11,752 12,100 14,962 (104) 26,958 22,559 16,291 6,269 4,789 8,448 1,545 583 4,723 7,443 14,294 2,599 3,885 6,842 7,452 26,958

FY10E 348 18,739 19,088 19,462 (43) 38,506 35,348 21,995 13,353 3,000 8,448 2,388 796 8,701 7,443 19,329 3,184 2,082 5,624 13,705 38,506

FY11E 348 25,809 26,158 20,464 (43) 46,578 48,348 27,435 20,913 2,000 8,448 2,642 881 10,003 7,443 20,969 3,302 2,093 5,753 15,216 46,578

FY12E 348 34,616 34,964 18,464 (43) 53,384 53,348 34,045 19,303 1,000 8,448 3,129 1,043 19,712 7,443 31,328 3,911 2,426 6,695 24,633 53,384 Securities Research

Source: Company, SBICAP Securities Research Please refer to our disclaimer given at the back cover page

16

Shree Cement Ltd Cash Flow Statement Year Ending in March PBT & extraord. Items Add: Depreciation Add: Interest Add: Others Cash Flow from operating activities Net changes - WC Foreign exchange loss paid Interest Paid Direct Taxes Paid Extraordinary Items Net cash from operating activities Capital expenditure Others Net Cash from investing activities Net free cash flows Debt change Dividend paid Net cash from financing activities Net change in cash Closing Cash Balance
Source: Company, SBICAP Securities Research

SBICAP Securities Limited


(Rs mn)

FY09 7,538 2,054 744 (580) 9,756 219 (2) (755) (1,644) (309) 7,265 (5,330) (3,215) (8,545) 1,910 1,655 (326) 1,328 48 4,723

FY10E 9,313 5,704 926 (422) 15,521 (471) (926) (3,661) 10,463 (11,000) 422 (10,578) (537) 4,500 (408) 4,092 3,978 8,701

FY11E 9,347 5,440 904 (422) 15,269 (220) (904) (1,859) 12,286 (12,000) 422 (11,578) 286 1,002 (408) 594 1,303 10,003

FY12E 11,435 6,610 915 (422) 18,538 (41) (915) (1,888) 15,694 (4,000) 422 (3,578) 11,694 (2,000) (408) (2,408) 9,709 19,712

Ratio Analysis Year Ending in March Valuations Metrics P/E (x) Price/Cash earnings (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) EV/tonne (USD) Profitability Metrics EBITDA margin (%) EBITDA per Tonne (Rs) (Cement) Adj Net Profit margin (%) B/S & Return Ratios Book Value per share (Rs) Current Ratio (x) Net D/E (x) RoE (%) RoCE (%) Growth Metrics Net Sales (%) EBITDA (%) Adjusted EPS (%)
Source: Company, SBICAP Securities Research

FY09 11.1 8.3 5.6 2.6 7.3 165.0 35.7 1,117.1 22.9 347.3 2.1 0.15 64.7 31.8 29.0 10.2 96.5

FY10E 9.1 5.1 3.5 1.9 4.7 136.3 41.1 1,353.9 20.4 547.9 3.4 0.12 47.4 28.2 36.3 57.1 21.5

FY11E 9.0 5.2 2.6 1.7 4.8 110.8 36.1 1,036.6 18.6 750.9 3.6 0.08 33.1 21.3 10.6 (3.0) 1.1

FY12E 7.2 4.2 1.9 1.2 3.3 92.1 36.6 1,008.9 19.7 1,003.6 4.7 -0.28 30.7 21.6 18.4 20.1 25.4

Securities Research

Please refer to our disclaimer given at the back cover page

17

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1,061

Recommendation Outperform Buy Buy Buy Buy Sell Buy Buy Buy Buy Buy Buy Buy Sell Buy

Recommended Price 64 230 547 104 226 73 1,200 285 134 173 1,170 1,190 297 310 400

Target Price 70 290 645 130 264 50 1,410 330 280 215 1,568 1,410 530 265 520

1,476 70 215 815 125

58 162 707 65

Key to investment Ratings: Guide to the expected return relative to market over the next 12 months. 1=Buy (expected to outperform the market by 15 or more percentage points); 2=Outperform (expected to outperform the market by 5-15 percentage points); 3=Marketperform (expected to perform in line with the market); 4=Underperform (expected to underperform the market) by 5-15 percentage points); 5=Sell (expected to underperform the market by 15 or more percentage points)

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