Hold Shree Cement: target of Rs 20500

Shree Cement’s results were below our estimates. Revenues registered an increase of 23.1% YoY to Rs 2,296.2 crore (vs. I-direct estimate of Rs 2302.0 crore) mainly led by 19.4% YoY increase in cement revenues to Rs 2,193.6 crore and 277.3% YoY increase in power revenues to Rs 102.6 crore The increase in cement revenues was due to 8.4% YoY increase in volumes to 5.3 MT and 10.1% YoY increase in cement realisations EBITDA margins declined 148 bps YoY to 24.8% (below I-direct estimate of 26.0%) mainly due to higher freight cost (up 41.5% YoY) and power & fuel cost (up 69.0% YoY, driven by higher pet coke prices). Cement EBITDA/t was up 6.0%YoY at Rs 1,079/t (vs. I-direct estimate: Rs 1,126/t). Overall EBITDA/t increased 7.2% YoY to Rs 1,070/t (vs. I-direct estimate of Rs 1,141/t) Outlook A revival in cement demand led by increased government spending; improving realisation in the company’s key markets and capacity expansion is expected to drive Shree’s revenues in FY17-19E. However, increase in pet coke prices and change in fuel mix (from pet coke to imported coal in CPP) are expected to weigh on the company’s profitability in the near term. In addition, decline in power volumes, increase in operating expenses and rich valuations remain key near term concerns. Hence, we maintain HOLD recommendation on the stock with a revised target price of Rs 20,500 per share.