| Summary of Contents
| STOCK UPDATE Shree Cement
Cluster: Cannonball
Recommendation: Hold
Price target: Rs3,100
Current market price: Rs2,643 Earnings in line with estimates Result highlights -
Strong volume growth in cement & power drives overall revenue growth: Shree Cement in its Q4FY2012 results posted a revenue of Rs1,477.8 crore which is higher by 38% on a year-on-year (Y-o-Y) basis. The revenue growth was driven by a 25% growth in its cement business and a sharp jump in the revenue from the sale of power units (around Rs289 crore as compared to Rs120 crore in Q4FY2011). The revenue growth of the cement division was supported by a 20.5% growth in the volume and 3.8% improvement in the average blended realisation. In the power division the robust revenue growth was driven by a 67% increase in the power volume due to commissioning of its second phase of power plant for 150MW. -
Increase in cost of production results in margin pressure: The operating profit margin (OPM) during the quarter has contracted by 246 basis points YoY to 25.2%. The margin contraction is largely on account of loss posted by the company in its power division to the tune of Rs68.6 crore as against a profit of Rs15.8 crore at the earnings before interest and tax (EBIT) level due to an increase in the production cost of power units. On the other hand the EBIT margin of its cement division has improved significantly to 21.1% from just 1.8% in Q4FY2011. Consequently the operating profit increased by 25.8% YoY to Rs373 crore (as compared to a revenue growth of 38% YoY). On a per tonne basis, the EBDITA per tonne of cement has increased by 17.8% YoY to Rs998 due to the increase in the average realisation. -
The other income surged to Rs77.4 crore: The other income of the company increased to Rs77.4 crore as compared to Rs20.7 crore in the corresponding quarter of the previous year due to provision of earlier year amounting to Rs37 crore being no longer required. Hence the surge in the other income has also supported the overall earnings of the company. -
Provided full tax rate as compared to write back of tax in Q4FY2011: The effective tax rate during the quarter works out to 33% (higher than our estimates) compared to the overall write-back of tax to the tune of Rs100 crore in the corresponding quarter of the previous year. -
Adjusted net profit of Rs117.1 crore in line with our estimates: The reported net profit of the company grew by 72.8% YoY to Rs114.3 crore. The reported net profit also includes Rs2.8 crore of extraordinary items. So adjusting for the same, the adjusted net profit works out to Rs117.1 crore (increased by 161.2% YoY) which is in line with our estimates. The board of directors of the company has recommended a second interim dividend of Rs6/share. Further the company has decided to change the accounting period from the current 12 months ending March to 12 months ending June. -
We fine tune earnings estimates for FY2013 and FY2014: We are incorporating better than expected volume growth in the power and cement divisions. We are also factoring in cost pressure on the power and fuel front. Overall we are marginally upgrading our earnings estimates, both for FY2013 and FY2014. The revised earnings per share (EPS) now works out to Rs101.6 and Rs129.3 for FY2013E and FY2014E respectively. -
Maintain Hold with a price target of Rs3,100: We expect the performance of the company to improve at the operating level due to better than expected volume growth in both, the cement as well as the power division. However, the key concern remains in terms of a) oversupply which is likely to put pressure on the cement realisation and b) cost pressure in terms of higher pet coke price. Hence we maintain our Hold recommendation on the stock with a target price of Rs3,100. At the current market price the stock trades at an EV/EBIDTA of 6.1x FY2013 and 4.9x FY2014 estimated earnings.
VIEWPOINT Eicher Motors The rise of a new challenger Result highlights Standalone Q1CY2012 results: Strong operating performance coupled with high other income boost profitability -
Eicher Motors' standalone revenues in Q1CY2012 grew 46.7% year on year (YoY) on the back of a strong 40.8% growth in volumes. The realisation per vehicle improved 4.2% YoY and 2.9% sequentially. This was primarily on account of a better sales mix (higher sales of 500cc bikes) and a price increase of about 3% taken in January 2012. -
The contribution per vehicle improved 5.6% on a Y-o-Y basis and 8.4% on a sequential basis. -
The operating margin improved 80 basis points on a Y-o-Y basis on account of lower material cost; it came 200 basis points higher than our estimates. -
A higher other income of Rs26.4 crore further boosted profitability. The profit after tax (PAT) at Rs45.3 crore more than trebled on a Y-o-Y basis. VECV Q1CY2012 results: Higher other expenditure impacts operating performance -
Volvo Eicher Commercial Vehicles (VECV)' revenues grew 19% YoY on the back of a 12.4% Y-o-Y growth in volumes. The realisation per vehicle grew 5.9% YoY but declined 6.3% sequentially. -
The contribution per vehicle however improved 10.9% on a Y-o-Y basis. This was primarily on account of a lower proportion of Volvo trucks where the company gets only a distribution margin. -
However an increase in other expenditure/sales to 10.9%, which is the highest in the last three years, restricted the operating leverage benefits and restricted the operating margin at the 10% mark. -
A higher other income and lower tax rate resulted in a 9.3% Y-o-Y growth in the net profit. Valuation
We arrive at the consolidated EPS estimates of Rs147 and Rs170.8 for CY2012 and CY2013 respectively after adjusting for minority interest. Given the bright prospects of the company after its association with Volvo, the stock can trade at 11x CY2013E earnings. We give only a book value per share of Rs100 to the Volvo engine venture on account of the longer than expected gestation period of the business. Even as the current price factors in the positives, we are bullish on the business from a longer term investment perspective.
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