We had previously preferred Shree Cements (SRCM) to other cement companies in our coverage. However, after the c81% ytd stock run, it now trades at an EV of $174/t of fully expanded capacity, which while lower than peers, is much higher than replacement cost.
At current price, the valuations imply that capacity which is not even set up yet gets valued at higher than the cost of setting it up, which looks excessive to us before we know how well SRCM’s brands are received at the new locations, and what sort of profitability the new plants can deliver. We raise TP to R6,332 (was R4,830) as we roll valuation base forward to FY17e, but downgrade the stock to UW.
4QFY14 reported Ebitda, at R440 crore, was just 1% ahead of consensus estimates. The weak translation of c14% y-o-y increase in revenue to just c13% y-o-y increase in EBITDA was due to higher freight cost (up c36%).
The c14% increase in revenue was achieved on a c31% increase in cement revenue on 2mt grinding unit addition in mid-May 14 and realisation improvement. The cement PBDIT increased c60% on strong leverage effect while that of power business fell c52% y-y due to c32% decline in sales and a collapse in margin to 26.5% (from 37.9% in Q4 FY13).
We are raising our Ebitda forecasts average c4% for FY15e-FY16e, which is 5% ahead of consensus in FY15e and 2% below FY16e. Foray into unknown markets and stricter conditions at home likely to check Ebitda.