On the back of higher spending by the government in infrastructure projects, 2010 Commonwealth Games and strong demand in rural areas, north India has successively posted a higher volume growth rate in the past three months (January to March 2009) compared to other regions.
Shree Cement is likely to be the main beneficiary, as it has strong presence in north India and also due to its relatively early expansion.
We expect the volumes during Q4FY2009 to grow by 15% year-on-year (y-o-y) and 12% quarter on quarter (q-o-q). The volume growth is much ahead of the management’s guidance given in January 2009 (post Q3FY2009 results).
On account of strong demand, the company raised cement prices by Rs4 to Rs6 per bag in the past couple of months (February–March 2009) and the management expects to sustain higher prices till the arrival of monsoon (mid June 2009).
However, the anticipated slowdown in new projects and government spending post general elections 2009 coupled with an upcoming capacity of 52 million metric tonne (MMT) by the end of FY2010 will put pressure on capacity utilisation and realisations of cement companies and also that of Shree Cement.
We have factored a decline of around 9% in the average realisation in FY2010 over FY2009 in our estimates.
Shree Cement has commissioned clinker manufacturing Unit VII of 1MMT capacity at Bangur City, Ras in Pali district of Rajasthan at a capital investment of Rs200 crore.
The commissioning of the unit is expected to help the company ramp up its annual cement production capacity to around 10.1-10.3 million tonne from 9.1 million tonne at present, depending upon its blending ratio.
Thus, Shree Cement would continue to benefit in terms of higher than industry average volume growth from its early expansion as compared to some of its peers.
At the current market price of Rs735 the stock trades at 5.3x and 8.8x its FY2009 and FY2010 earnings estimate respectively, an enterprise value (EV)/ EBIDTA of 3.2x FY2010 and EV/tonne of $63 on expanded capacities of 10.1 million tonne.
We have been bullish on cement sector since the past four months with Shree Cement as one of our top picks. The stock has appreciated by over 45% since our last update on January 30, 2009.
We maintain our BUY call on the stock with a revised 12-month price target of Rs825 (EV/tonne of $70 on expanded capacity).