Better valuations ahead
Shree Cement Pulling ahead
Shree Cement (SRCM) reported an EBITDA/t of Rs 1,183, much higher than peers. Volume growth continued to impress (3.7 mTPA, 17.3 per cent YoY) and realisations remained strong in the aftermath of the Binani closure (Rs 4,009/t, 11.3 per cent YoY, 3.4 per cent QoQ). Power division barely broke even (EBITDA loss of Rs 10 mn), given higher landed fuel costs. This was also reflected in cement operating costs hardening by ~1.4 per cent QoQ (to Rs 2,825/t or Rs 141/bag) SRCM announced the acquisition of JPAÆs Panipat grinding unit (1.5 mTPA) for Rs 3.6 bn (US$ 40/t). Given its excess clinker capacity in North, the acquisition is a shot in the arm as it provides a ready grinding capacity at a reasonable valuation. It also brings the company closer to its target of 25 mTPA by 2015. The company may show positive movement in stock valuations given, 1) Unmatched operational excellence, outlined in its lowest cost; and 2) Capital cost leadership, as demonstrated through continued reinvestment at reasonable cost.
Freight costs registered a moderate decline QoQ (Rs 855/t), while RM costs continued to harden. Implied power and fuel expenses for cement division also increased ~3 per cent sequentially, driven by higher fuel prices. Power division continued to disappoint with weak volumes (~500 mn kWh, -7.2 per cent QoQ, -37.3 per cent YoY) and realisations (Rs 3.36/kWh, 1.4 per cent QoQ, -13.5 per cent YoY), resulting in an EBITDA loss of ~Rs 10 mn.
Outlook: HDFC Securities has revised FY16 estimates upwards by 22 per cent/30 per cent on EBITDA/PAT, led by an increase in volume/realisation assumptions. On replacement cost basis, SRCM trades at par with Ambuja Cement (~US$ 165/t). With 23 mTPA capacity clearly visible, SRCM is set for its next round of capacity expansion, likely in Raipur (East), where it has already laid groundwork for future expansion.
Mixed signals from UltraTech
UltraTech Cement reported mixed set of numbers for Q1FY15. Revenue grew by 13.9 per cent YoY to Rs 56.5 bn, primarily on the back of higher volumes. EBITDA declined by ~4 per cent YoY to Rs 10.1 bn. EBITDA margin witnessed a dip of 331bps YoY to 17.8 per cent, due to increase in power and fuel cost. This is led to fall in PAT by 7 per cent YoY to Rs 6.26 bn, which partially off-set by rise in other income by 28.7 per cent YoY to Rs 2.1 mn due to higher treasury gains. The EPS for the quarter came in at Rs 22.80 against Rs 24.53 in the same period of the last year.
Total sales volume during the quarter increased by sharp 15.8 per cent YoY to 11.96 mn tonnes. This was due to capacity additions in the eastern and southern regions and the acquisition of Jaypee Cement´s Gujarat plant. The blended realisation per tonne for the quarter improved by 1.9 per cent QoQ to Rs 4,725/tonne, due to the full impact of sharp price hikes witnessed in North and West India during February-March 2014. However, it was down by 1.6 per cent YoY.
The average cost per tonne increased by 2.6 per centYoY and 3.6 per cent QoQ, due to the rise in power and fuel cost. Power and fuel cost went up by 5.4 per cent YoY and 6.4 per cent QoQ, due to an increase in petcoke prices. Consequently, EBITDA per tonne for the quarter stood at Rs 843 vs to Rs 914 in the previous quarter and Rs 1,016 in Q1FY14.
The company amalgamated the acquired unit of Jaypee Cement (Gujarat plant) from June 12 onwards. Post this, UltraTech´s capacity has gone up to ~59 mn tonnes. Moreover, it added a power capacity of 31.5 MW, taking the total Captive Power Plant capacity to 709 MW.
Positive on demand
UltraTech´s management believes that cement demand is likely to grow at 7-8 per cent with expected double digit growth in H2FY15. This is on the back of renewed focus on infrastructure and initiatives announced in Union Budget to accelerate the demand growth.
The management also highlighted that indirect entry barriers like land acquisition, high capital cost and increasing gestation period due to regulatory clearances may restrict future capacity expansion. This will result into better utilisation and improved realisations. At CMP the stock is trading at P/E of 26.8x FY15E and 20.7x FY16E. The stock has witnessed sharp run in the recent past, and may have such upward trend in future too.