Accumulate Shree Cements; target of Rs 20748: Kotak Securities

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Kotak Securities' research report on Shree Cements

Company's revenues for Q3FY18 reported an improvement of 25% YoY, in line with our estimates. Growth in revenues was led by 8.4% YoY improvement in cement volumes and 11.4% YoY jump in cement realizations. Power segment sales have also witnessed drastic improvement on YoY basis.  Operating margins stood strong at 24.8% for the quarter and impacted by sharp jump in power and fuel cost and freight cost on YoY basis. Better than expected margins and lower tax expense led to net profit coming ahead of our estimates.  We introduce FY20 estimates and roll over our valuations on FY20 estimates. At current market price of Rs 19512, stock is trading at 20.9x and 20.3x P/CEPS and 19.2x and 18x EV/EBITDA on FY19/FY20 estimates respectively. We believe that Shree Cement is adequately positioned with its expanded capacities to capture the upswing in demand and prices in northern India. However, the risk of potential ban on pet coke usage or import of pet coke would have an adverse impact on the overall power and fuel cost for the company.

Outlook
We roll forward our valuations on FY20 and arrive at a revised price target of Rs 20748 based on average of 18x EV/EBITDA and $230 per tonne on EV/Tonne and adding valuations of power business. Owing to limited upside from the current levels, we maintain ACCUMULATE rating on the stock. We would be watchful of further updates on pet coke usage and pet coke import ban.For all recommendations report, click here

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