Shree Cements (SCL) – Q3 FY07
CMP: Rs1,489.90
Target: Rs1,726
Rating: BUY
Cement dispatches increased sharply in Q3FY07 by 79.5% yoy to 1.29mn ton. On qoq basis the same increased by 16.7%. Capacity utilization of the enhanced capacity touched 116% for the quarter. SCL increased its clinker to cement conversion ratio from 1.36 in Q2FY07 to 1.41 in Q3FY07. We expect cement volumes to clock 6.23mn ton in FY08 as 1.5mn ton integrated cement plant is expected to go on line from FY07 end at Unit 4and Unit 5 with 1.2mn ton clinker capacity with split grinding capacity of 2 mn ton is expected to come on line from Dec 2007.
SCL’s realization per ton increased yoy by 40.7% in line with the industry to Rs2817, in Q3FY07. On qoq basis it fell from Rs2849, as SCL tested new markets during the quarter. On yoy basis operating margin improved by 1400 bps to 43.9% in Q3FY07, but eased from 45.2% recorded in Q2FY07. Fall in realization coupled with increased freight cost to venture new pockets has brought down the operating margin. We expect operating margins to improve in the coming quarter as realization improves in the peak construction period and freight expenses coming back to normal levels.
SCL’s CMP of Rs1482 discounts our estimated EPS of Rs109.8 and Rs143.8 for FY07P and FY08P by 13.5x and 10.3x respectively. We expect SCL to command better valuations going forward with multifold increase in capacities and increase in blending ratio. We rate the stock as BUY with a target of Rs1726. Our target price discounts FY08 estimated earnings by 12x and EV/EBIDTA by 7.7x.