27 January 2014
2QFY14 Results Update | Sector:
Cement
Shree Cement
BSE SENSEX
20,707
Bloomberg
S&P CNX
6,136
SRCM IN
CMP: INR4,326
TP: INR5,100
Buy
Equity Shares (m)
34.8
M.Cap. (INR b) / (USD
150.7/2.4
b)
52-Week Range (INR) 5,210/3,413
1, 6, 12 Rel. Per (%)
1/-7/-6
Financials & Valuation (INR B)
Y/E JUN
Sales
EBITDA
2014E 2015E 2016E
54.4
12.0
66.1
15.9
7.8
295.0
26.4
1,458
16.4
18.9
14.7
3.0
9.0
82
76.1
19.6
9.7
380.1
28.9
1,702
17.7
20.5
11.4
2.5
6.5
78
NP
6.6
Adj EPS
233.4
(INR)
EPS Gr (%) -25.9
BV/Sh(INR) 1,265
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
EV/EBITDA
( )
EV/Ton
( S )
16.0
16.7
18.5
3.4
11.7
91
Strengths in cement business diluted by weak merchant power:
Shree Cement’s
(SRCM) 2QFY14 revenue de-grew -7.8% YoY (+5.6% QoQ) to INR13.2b (v/s est. of
INR13.5b), impacted by lower contribution from power business. Cement volume
grew 14.7% YoY (+5.4% QoQ) to 3.44mt (v/s est. of 3.1mt), which includes clinker
of 0.03mt. Realizations were marginally ahead of estimate at INR3,430/ton (v/s
est. of INR3,334), down 8% YoY (+3% QoQ). However, merchant power revenue
de-grew -56% YoY at INR1.38b (v/s est. of INR2.4b), driven by (1) lower power unit
sold at 409m (v/s est. of 790m), -48% YoY, and (2) weaker realizations of
INR3.38/unit (INR3.97 in 2QFY13).
Cement profitability improves on higher realizations:
EBITDA de-grew 28% YoY
(+8% QoQ) to INR2.7b (ahead of est. of INR2.4b), translating into EBITDA margin of
20.5% (v/s est. of 18.1%), down 5.5pp YoY and up 0.5pp QoQ. Cement EBITDA/ton
stood at INR716/ton (v/s est. of INR578/ton), +INR46/ton QoQ (-INR301/ton YoY).
Cement profitability beats estimates meaningfully due to higher realizations
(+INR96/ton QoQ, higher than est. to the same extent), and lower cost due to
benefit of positive operating leverage.
PAT impacted by lower other income:
PAT was impacted by lower other income
to INR1.2b, down 48% YoY (v/s est. of INR1.5b). Other income was higher in the
last quarter due to a gain on FMP maturities, unlike in 2QFY14.
Cut FY14 estimates due to weaker power business, maintain Buy:
We revise the
EPS for FY14E/15E/16E by -14%/-2%/-1% to factor: (a) lower PLF and realization in
merchant power, resulting in almost 38%/43% cut in power revenue/EBITDA in
FY14 and (b) cement EBITDA is broadly intact after assuming (1) higher volume
growth in FY14E (7.9% v/s earlier est. of 5.5%), (2) better realizations in FY14E
(-INR2.5/bag YoY v/s earlier est. of -INR3.5/ton YoY), and (3) moderate upward
revision in freight cost. This translates into an SOTP-based target price of INR5,100
(+18% upside).
Jinesh Gandhi
(Jinesh@MotilalOswal.com); +91 22 3982 5416
Sandipan Pal
(Sandipan.Pal@MotilalOswal.com); +91 22 3982 5436
Investors are advised to refer through disclosures made at the end of the Research Report.

Shree Cement
Cement volume strongly beats est, realization up 3% QoQ; Lower merchant
power sales keeps total revenue in line
Revenue de-grew -7.8% YoY (+5.6% QoQ) to INR13.2b (v/s est of INR13.5b),
impacted by lower contribution from power business.
Cement volume grew 14.7% YoY (+5.4% QoQ) to 3.44MT (v/s est of 3.1MT),
which includes clinker of 0.03MT
Realizations were marginally ahead of estimate at INR3,430/ton (v/s est of
INR3,334), declined 8% YoY (+3% QoQ)
Merchant Power revenue stood at INR1.38b (-56% YoY) v/s est of INR2.4b,
which was driven by (1) lower power unit sold stood at 409 m (v/s est of 790 m),
-48% YoY, and (2) weaker power realizations, which stood at INR3.38/unit (v/s
est of INR3.9/unit and INR3.97 in 2QFY13). Abnormally good monsoon led to
higher availability of hydro power, resulting into lower volume in 2QFY14.
Merchant power posted weaker volumes and realizations
Cement business posted higher volume and realizations
Source: Company, MOSL
Source: Company, MOSL
Cement profitability improves on higher realizations; power margins down
QoQ/YoY
EBITDA de-grew 28% YoY (+8% QoQ) to INR2.7b (ahead of est of INR2.4b),
translating into EBITDA margin of EBITDA margin of 20.5% (v/s est of 18.1%),
down 5.5pp YoY and up 0.5pp QoQ.
Cement EBITDA/ton stood at INR716/ton (v/s est of INR 578/ton), +INR 46/ton
QoQ (-INR 301/ton YoY).
Cement profitability beats estimates meaningfully due to higher realizations
(+INR 96/ton QoQ, higher than est. to the same extent), and lower cost of
INR2,715/ton (v/s est of INR2,756/ton).
While RM + Energy costs were in line with estimates, total cost were lower due
to benefit of positive operating leverage, albeit partially offset by higher freight
cost.
EBITDA of merchant power business plunged sharply to ~INR234m (v/s est
INR632m), with EBITDA/unit at INR0.6t (v/s INR0.7 in 1QFY14 v/s est INR0.8), led
by weak realizations (-12% QoQ).
PAT was impacted by lower other income to INR1.2b, down 48% YoY (v/s est of
INR1.5b). The other income was higher in last quarters as there were gain on
FMP maturities, while in 2QFY14, there was no FMP maturity.
2
27 January 2014

Shree Cement
EBITDA margin improves on better cement profitability
EBITDA (INR m)
EBITDA (%)
Trend in cement EBITDA (INR/ton)
EBITDA (INR/Ton)
Source: Company, MOSL
Source: Company, MOSL
Trend in power EBITDA
Source: Company, MOSL
Cement business income statement (INR/ton)
Net Realization
Raw Material Cost
Staff Cost
Power & fuel
Freight & selling Exp
Other Exp
Total Exp
EBITDA
EBITDA Margin (%)
2QFY14
3,430
265
294
575
817
763
2,715
716
20.9
2QFY13
3,724
379
250
592
762
723
2,706
1,017
27.3
YoY (%)
-7.9
-30.2
17.6
-2.8
7.2
5.5
0.3
-29.6
1QFY14
QoQ(%)
3,334
2.9
306
-13.4
311
-5.3
525
9.7
765
6.9
759
0.6
2,664
1.9
670
6.9
20.1
Source: Company, MOSL
Revising estimates
We are revising our EPS for FY14/15/16 by -14%/-2%/-1% to factor in for:
Lower PLF and realization in merchant power business, resulting into almost
38%/ 43% cut in power revenue/EBITDA in FY14
Cement EBITDA is broadly intact after assuming (1) higher volume growth in
FY14 (7.9% v/s earlier est of 5.5%), (2) better realizations in FY14 (-INR2.5/bag
YoY v/s earlier est of –INR3.5/ton YoY), and (3) moderate upward revision in
freight cost
This translates into FY14/15/16 cement EBITDA/ton of INR798/INR946/INR1,072
and SOTP of INR5,100 (+18% upside).
3
27 January 2014

Shree Cement
Revised forecast
(INR B)
Net Sales
EBITDA
Net Profit
EPS (INR)
Rev
54.4
12.0
8.3
233.4
FY14E
Old
57.1
12.8
9.7
272.2
Chg (%)
-5
-6
-14
-14
Rev
66.1
15.9
9.7
295.0
FY15E
Old
65.7
16.2
10.0
302.0
Chg (%)
1
-2
-2
-2
FY16E
Rev
Old
Chg (%)
76.1
75.8
0
19.6
19.7
-1
12.1
12.2
-1
380.1
383.3
-1
Source: Company, MOSL
Capacity to be gradually increased to ~24mt by Jun-16
It has commissioned line-9 with clinker capacity of 2mt at its Rajasthan plant in
3QFY13, while line-10 with clinker capacity and supporting split grinding units
are expected to commission by Jun-14.
SRCM has started work on setting-up Greenfield plant in Chhattisgarh with total
capacity of 5mt (commissioning in 2 phases by Jun-15 and Jun-16), with total
capex of ~INR22b (excl CPP). This will take total capacity to ~24mt by Jun-16
(~19mt by Jun-14 and ~21.5mt by Jun-15).
SRCM would be funding these capacity expansions largely through internal
accruals. We estimate SRCM to generate cash flow from operations of ~INR49b
over FY14-16E and has net cash of INR10.8b as of Dec-13 (~INR14.4b as of Jun-
13). It would be investing ~INR12b/INR18b in FY14/FY15 for these capacity
expansions.
Valuation and view
Weakness in demand is expected to reflect in subdued pricing over 1HCY14.
Recovery in demand, lower capacity addition and recovery in prices would be
the key drivers of sustainable improvement in operating performance.
SRCM is well placed for next leg of growth in cement business with strong
balance sheet (net cash of over INR10.8b as of Dec-13) and 5MT of new
Greenfield expansion plan which would take total capacity of ~24mt by Jun-16.
We expect SRCM’s superior profitability to sustain, with cement EBITDA/ton of
INR1,072/ton in FY16 (v/s MOSL Universe average of ~INR982).
The stock trades at 9x/6.5x EV/EBITDA on FY15/16E and USD78/ton FY16E
(adjusting for Merchant Power assets of ~400MW). Maintain
Buy
with revised
SOTP based target price of INR5,100 (18% upside).
Shree Cement - Sum of the parts valuations
INR M
Cement business
Merchant Power
Total EV
Less: Net Debt
Equity Value
Fair Value (INR/share)
EV/Ton at TP (USD)
Parameter
EV/EBITDA
DCF
Factor
8.0
@ 15% WACC
FY15
FY16
130,886
137,387
20,832
18,713
151,718
156,100
-8,105
-23,095
159,822
179,195
4,600
5,100
96
101
Source: Company, MOSL
27 January 2014
4

Shree Cement
Shree Cement: an investment profile
Company description
Shree Cement is the largest single-location
integrated cement plant in North India, with an
installed capacity of 13m ton. It is strategically
located in central Rajasthan from where it can
cater to the entire Rajasthan market as well as
Delhi and Haryana, with economic logistics cost. It
is a significant player in North India. Over the years,
it has established a reputation as one of the world’s
most efficient cement manufacturers.
Key investment arguments
Recent view
Declared interim dividend of INR10/share
Valuation and view
The stock trades at 9x/6.5x EV/EBITDA on
FY15/16E and USD78/ton FY16E (adjusting for
Merchant Power assets of ~400MW).
Maintain
Buy
with revised SOTP based target price
of INR5,100 (18% upside).
Sector view
One of the most cost efficient cement producers in
India
One of the efficient cement manufacturer, best
positioned to manage downturn in the cycle
De-risking its business by diversifying into power.
Being a single location plant, it is heavily dependent
on North India; any downturn in prices in the North
would adversely impact its profitability
Increase in pet coke prices could impact
profitability, as it uses pet coke as feedstock for
captive power plant as well as to fire kiln.
Key investment risks
Post weak pricing environment during monsoon,
cement prices and demand are expected to pick-
up post monsoon.
Structural increase in cost base (both capex and
opex) would necessitate higher cement prices.
Revival in cement demand would be key catalyst
for the stock performance.
Comparative valuations
P/E (x)
P/BV (x)
EV/EBITDA (x)
EV/Ton (USD)
FY14E
FY15E
FY14E
FY15E
FY14E
FY15E
FY14E
FY15E
Shree Cement
18.5
14.7
3.4
3.0
11.7
9.0
91
82
ACC
21.6
15.3
2.4
2.3
10.9
7.3
78
71
ACEM
19.3
15.8
3.0
2.8
10.7
8.0
119
112
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
FY14
FY15
233.4
295.0
Consensus
Forecast
247.5
292.8
Variation
(%)
-5.7
0.8
Target price and recommendation
Current
Price (INR)
4,326
Target
Price (INR)
5,100
Upside
(%)
17.9
Reco.
Buy
Shareholding pattern (%)
Promoter
Domestic Inst
Foreign
Others
Dec-13
64.8
5.9
18.9
10.5
Sep-13
64.8
5.7
19.0
10.5
Dec-12
64.8
6.2
17.6
11.4
Stock performance (1-year)
27 January 2014
5

Shree Cement
Financials and valuation
27 January 2014
6

Shree Cement
NOTES
27 January 2014
7

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Shree Cement
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SHREE CEMENT LTD
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