Hold Shree Cement; target of Rs 19700: ICICI Direct
ICICI Direct’s research report on Shree Cement
Gandhi Special Tubes (GST) reported a healthy Q2FY18 performance (sales up 8.4% YoY, margins up 440 bps YoY) despite one of its main business segment (fuel injection tubes) going off stream due to mandatory conversion to BS-IV norms in the domestic M&HCV space Net sales for the quarter came in at | 29.8 crore. EBITDA in Q2FY18 was at | 11.4 crore with corresponding EBITDA margins at 38.3%, up 440 bps. Savings were realised across variables viz. raw material costs, power & fuel costs and other expenses PAT in Q2FY18 was at | 8.7 crore, up 41% YoY For H1FY18, net sales were at | 58 crore, up 7% YoY while EBITDA was at | 22 crore, up16% YoY and PAT came in at | 18 crore. PAT is flat YoY due to higher tax incidence in H1FY18 vs. H1FY17.
GST’s performance in H1FY18 is impressive amid a challenging demand scenario, depicting diversification of product and customer base. Sustenance of 37%+ EBITDA margins is also encouraging given capacity utilisations at muted levels of below 50%. It has a lean balance sheet with surplus cash & investments of | 97 crore (FY17). With robust dividend payout (>40%) amid high double digit margins, GST realises robust return ratios with RoCEs & RoICs in excess of 20% & 30%, respectively. The company also holds an option value of any global technology tie-up to better utilise its idle capacity at its plant in Gujarat. Going forward, we expect sales & PAT to grow at a CAGR of 9.1% & 6.9%, respectively, over FY17-19E. We now value GST at | 345, i.e. 15x P/E on FY19E EPS of | 23.1/share with a HOLD rating on the stock.
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