Buy Shree Cement; target of Rs 22,854: Edelweiss
Edelweiss’ research report on Shree Cement
Shree Cement’s (SRCM) recent board meeting had two outcomes: 1) Q3FY18 results – wherein INR5.7bn EBIDTA (up 16% YoY) surpassed our INR4.9bn estimate owing to low ‘other expenses’, given continued tight leash on costs. While revenue and variable cost were in line, we cut FY18/19E EBITDA by 10%/19% factoring in rising fuel cost pressures. We also introduce FY20E EBITDA with 32% growth to reflect imminent improvement in industry clinker utilisations; 2) SRCM approved acquisition of majority stake in UAE-based Union Cement Company (UCC) for an EV of USD305mn. While implied EV/t of USD76 (4mtpa capacity) appears lucrative, UCC is likely to generate low RoE of ~6-7% at its current EBITDA margin of ~22%. As RoE will merely meet potential yield loss for SRCM (hence no EPS/RoE dilution risk), we see no great merit in the acquisition at current margins. In our view, asset creation in India would have generated far higher returns for the amount invested and hence find it a sentimental negative in the immediate term. We value UCC at 8x EV/EBITDA and continue to value robust India business at 17x. Rolling over valuations to FY20E, we maintain ‘BUY’ with a target price of INR22,854 (INR21,140 earlier).
Notwithstanding current cost challenges, we maintain long term positive view on cement sector in India given imminent rise of industry clinker utilisation. Maintain ‘BUY/SO’ with TP of INR22,854 given superior RoE profile over peers in India.
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