Shree Cement

Shree Cement looks to be an attractive bet for medium to long-term investors, considering its growth plans in the northern region

 

   SHREE Cement, a leading player in the northern region, has aggressively expanded its capacity over the past three years, at a time when demand for cement in this region has been rising. Cement dispatches in the northern region grew 13.4% year-on-year during the year ended March 2010, as per various estimates, one of the highest growth rates in the various regions of the country.

   The company has rapidly expanded its captive power generation capacity over the past few years to minimise the impact of the cyclical nature of the cement industry. This ensures that it is self-sufficient in its captive power requirements and at the same time sells excess power in the open market on merchant basis.

   The Shree Cement stock recently hit a 52-week high, but at Friday's close of Rs 2,249.7, it is still trading at a P/E multiple lower than that of lead players like ACC.

CAPACITY:

The company's cement capacity at the end of March 2009 was 6.82 million tonne, a rise of 150% from three years earlier. However, including its clinker capacity, its total sales amounted to 8.45 million tonne at the end of FY09, a rise of 37.2% on a CAGR basis from March 2006. In addition, the company is self-sufficient in meeting its key operational cost for the cement business, namely power, with its captive capacity of 119.5 MW at the end of FY09, which was more than double the levels three years earlier. Apart from meeting its power requirements for its core cement business and ensuring one of the lowest power cost per tonne for cement dispatched (see table), Shree Cement has also grown the turnover of its power division by selling electricity in the open market.

   As a result, during the first nine months of FY10, the power division contributed 18% to the company's net sales of Rs 2,688 crore, as compared to 16.7% in the corresponding period of the previous year.

   Shree Cement had invested Rs 2,648 crore during March 2006 and March 2009, while its operational cash flow during the period was Rs 2,136.5 crore, which resulted in its leverage ratio at 1.5 at the end of FY09, higher than three years earlier, but the company is comfortably placed to service the debt without any difficulty. The company recently commissioned a 1.8 million tonne clinker unit at Uttarakhand, and a similar size facility at Rajasthan, which involved a total capex of nearly Rs 340-350 crore, as per various estimates. In addition, the company's captive power capacity at the end of March 2010 was nearly 210 MW. This increased capacities in the cement and power divisions have been financed via internal accruals and debt. Shree Cement will soon bring on stream another 50 MW of captive power capacity, and an additional 1 million tonne cement capacity that is expected to be commissioned over the next 8-10 months.

FINANCIALS:

The company's operating profit margin improved by 520 basis points y-o-y to 38.6% during the December 2009 quarter, at a time when its net sales also improved by 30.3% to Rs 866 crore. The company's cement dispatches amounted to 2.27 million tonne, a rise of almost 17%, in the third quarter of FY10, while its realisations improved an estimated 9.7% to Rs 3,626 per tonne. This is in contrast to the situation in South India in the third quarter of FY 10. In addition, in Shree Cement's power division, segment profit improved 57.4% in the December '09 quarter.

VALUATIONS:

Shree Cement at Rs 2,249.7 per share trades at 8 times on a trailing four quarter basis. ACC, trades at 10.8 times on a trailing basis, while other players with a strong focus on the northern markets, such as Binani Cement, trades at 6 times, and JK Cement trades at 5.5 times. Investors could consider Shree Cement with a medium to long-term investment horizon.