Scripscan:Shree Cement Ltd
cmp:2080
Code:500387
Story:Shree Cement Limited engages in the manufacture and sale of cement in India.The company offers cement under the Shree Ultra, Bangur, and Rockstrong brand names. It also involves in power generation business.Shree has recently entered in a contract for sale of 225MW of power for H2FY12 with various SEBs like Punjab, UP etc at a price of Rs 4.35/unit.I expect Shree to sell 122mn units for FY12 with EBITDA/unit of Re 1. Also, the uptick in prices which started in Sept-11 has gained momentum & as of Oct-11 prices in northern India are already up Rs 18-20/bag from Q2FY12 average of Rs 247/bag. Hence Shree is set to deliver significant improvement in profitability in both its businesses over next 2-3 quarters. Further cement margins are expected to improve with higher proportion of cement in total dispatches (Oct cement volumes up14.5% clinker volumes -98%).Despite building in for higher RM costs (on account of higher proportion of cement production) & lower power volume we upgrade our EBITDA estimate by 8%/5% for FY12E/13E.Shree remains my top mid-cap pick in the sector.With improved earnings outlook,I feel it can hit to Rs 2500 in the medium term.I continue to value Shree’s at 25% discount to ACC (6.5X EV/E & USD110 EV/t) yielding us a value of Rs 2200/share for cement business alone.The current stock price implies negative value for power business.However with power offtake tied up for the next 3 quarters, market should assign some value to power business (Rs 300/share in my estimate @ 4.5X FY13 EV/E) leading to re-rating of the stock.
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