Shree Cement

Investors with a medium- to long-term horizon can consider buying the stock of the mid-cap cement player Shree Cements. Positioned in the northern region, the company's rising market share, self-sufficiency in power and cost-efficiency augur well for earnings over the medium term, even as most other cement players struggle with excess supply.

At the current market price of Rs 2,205, the stock is trading at 10 times its expected FY10 earnings and eight times its expected FY11 earnings, at a discount to large-size peers.

Between April and December, the company's despatches rose 25 per cent against the industry average of 13 per cent and the regional average of 17 per cent.

Strong cement offtake in the North following Government-led housing projects in the rural areas and construction activity related to the Commonwealth Games in the Delhi NCR have seen quick absorption of the additional cement supplies. Shree Cements' units are all running at full capacity currently. There may be some correction in utilisation rates over the next six months with some 9 million tonnes of capacity in the pipeline for the region (new capacities of Grasim Industries, JP Associates and Ambuja Cements).

With over 2 million tonnes of capacity addition, Shree Cements will close FY10 with a capacity of 10 mtpa (7.7 mtpa last year) and increase it to 12-12.5 mtpa by FY11. The company reported a five-year annualised growth of 22 per cent in volumes and 38 per cent in sales. Its power needs are met in-house through captive power capacities of 120 MW. The surplus power (close to 35 MW) is also sold in the market.

The company recently announced entry into power generation, to take advantage of high merchant power tariffs, by building a 300-MW thermal power capacity with an investment of around Rs 1,200 crore. As this project is expected to be ready only by the first quarter of 2012 and coal linkages have not been fully arranged, we have not factored this in our earnings estimation. For capex in the cement segment, the company has planned an outlay of Rs 600 crore for 2010. It intends funding the capex activities through a combination of debt and internal accruals. Shree Cement has strong cash coffers and the debt-to-equity ratio stands at 1.2.

The company's power-fuel costs have come down 11 per cent in the half-year ended September 2009, thanks to the fall in prices of pet coke and imported coal. Operating margins were higher by 10 percentage points at 35 per cent. Net profit for the half-year ended September 2009 more than doubled to Rs 587 crore.

via BL