Stock Update Shree Cement
Reco: Hold
PT: Rs11,400
CMP: Rs10,375
High depreciation and tax expense restricts earnings growth; PT revised to Rs11,400 Key points - Decline in cost results in strong operating performance, high depreciation and tax expense restricts earnings growth: For Q2FY2016, Shree Cement reported a revenue growth of 18.4% YoY to Rs1,828.8 crore driven by volume growth (up 23.3% YoY) in cement (capacity addition) and increase in volumes of power segment (up by 9.7%). Realisation in cement declined by 1.2% YoY, however power segment's realisation declined by 14.0% YoY. The company reported a net profit improvement of 9.7% to Rs102.8 crore (which includes an extraordinary cost of Rs0.8 crore for Q2FY2015) on account of higher depreciation (up 51.4% YoY) and higher effective tax rate of 14.4%. Further, the company has shifted its accounting year end from June to March hence FY2016, will be accounted for nine months only.
- Superior operating performance in both divisions: The performance of power division for the quarter improved substantially on account of sharp decline in cost (decline in price of pet coke), hence the company reported almost two-fold increase in EBIDTA per unit. The EBIDTA per unit for the quarter stood at Rs0.91 as against Rs0.48 same period last year. However, the performance of cement division was supported by lower power and fuel cost (down 11.5% YoY on per tonne basis) and freight cost (down 8.7% YoY) leading to a 7.9% YoY growth in EBIDTA per tonne, which stood at Rs800 per tonne. As per the management, the current demand in northern part of the country is likely to improve going ahead.
- Retain Hold with price target of Rs11,400: The company has shifted its accounting year from June to March, hence we have reported numbers for nine months only for FY2016. Shree Cement is one of the most efficient cement players in India but it continues to trade at premium valuation as compared with the other pan-India cement players. Further, we have revised earnings estimates downwards for FY2016 and FY2017 factoring higher depreciation and tax rate (we have introduced FY2018 earnings estimate). We have also revised our price target downwards to Rs11,400 (on account of revision in EV/Ebitda multiple due to near-term pressure on cement price affecting realisation) and maintained our Hold rating on the stock. At the current market price, the stock is trading at 14.5x its EV/EBIDTA and PE of 30.5x its FY2017E.
Crompton Greaves
Reco: Hold
PT: Rs185
CMP: Rs167
Poor show; eye on consumer listing Key points - Poor Q3 result; consumer numbers excluded: The Q3FY2016 numbers reported by Crompton Greaves Ltd (CGL) excludes numbers of the demerged consumer business. Its operating performance was poor and substantially lower than our as well as Street estimate. The stand-alone business was affected with weaker power system sales which had a bearing on its margin and earnings. The performance of overseas subsidiaries deteriorated (operating level loss of Rs43 crore) further and dragged the overall performance. At the net level, Rs125 crore of loss by subsidiaries coupled with drop in stand-alone profit resulted into higher net loss (Rs96 crore loss in Q3FY2016 vs Rs49 crore in Q3FY2015) for the consolidated entity.
- Overseas business divesture failed to conclude; order book remains subdued: The Q3 result includes few extra-ordinary items; it includes a gain of Rs426 crore from sale of land at Kanjurmarg facility but also includes provision for advances given to subsidiaries and loss of sale of Canadian operations of around Rs410 crore. Consequently, there is an extra-ordinary gain of around Rs30 crore in this quarter and the net debt has been reduced to Rs900 crore (repayment from proceeds of Kanjurmarg land monetisation). On the negative side, the divesture of the international operations failed to conclude, which we believe would be sentimentally negative for the stock, given the continued burden of the international operations. There is a re-jig of the senior management at CGL; Mr Neelkant is going to take over as CEO and MD, replacing Mr L Demortier.
- Revised down earnings and await listing of consumer business ahead: We believe, the focus of CGL management has been on restructuring for some time now and the outlook remains tepid, as reflected in the soft order book picture. Given the scenario, we have trimmed our estimate for the CGL. Though the Q3 result excludes the demerged consumer business and restated accordingly, we continue to include consumer business in our current estimate as the demerged consumer business is yet to get listed. We believe CGL (ex-consumer) is having significant headwinds ahead while the consumer business (to be listed in future) is likely to sustain healthy performance and derive substantial value for shareholders post-listing. Therefore, we recommend investors to Hold the stock till the listing of its consumer business.
Sector Update Automobiles Mixed performance The passenger vehicle sales in January 2016 were off on a rough pitch with the largest domestic car maker, Maruti Suzuki India Ltd (MSIL), posting a marginal increase in sales. The other car manufacturers including Tata Motors (TAMO) posted a decline of 17.8% in the passenger vehicle segment in the domestic markets. The two-wheeler volumes remained weak due to the continued sluggishness in rural demand. Royal Enfield (Eicher Motors) bucked the industry trend registering a strong volume growth of 65% YoY. The commercial vehicle segment continued to grow on the back of higher growth from the MHCV segment. The LCV segment remained subdued on the back of weaker demand from urban areas. Industry majors TAMO and Ashok Leyland Ltd (ALL) have registered a strong volume growth of 30% and 40% YoY respectively in the MHCV segment. The tractors exhibited a flattish growth with the industry leader Mahindra & Mahindra (M&M) registering a minimal growth of 1% on a Y-o-Y basis. Key takeaways from the month's performance - The market leader MSIL registered a decline of 2.6% YoY for the month of January 2016 on the back of lesser no. of working days and maintenance shut downs taken by the company. The newly launched Baleno and Celerio upgrade failed to sustain the traction gained initially. Contrary to MSIL, Hyundai reported a strong set of numbers for the month of January 2016 registering a growth of 9.3% YoY. The new launches by the company like the Creta, I20 and Grand (upgrade) helped in gaining traction in the sales volumes for the month. The utility major, M&M, registered a 13.4% Y-o-Y rise in the UV segment. The new launches KUV100 and TUV300 drove the sales volumes for the company higher in the month of January 2016. The total passenger vehicle segment for M&M grew at 12.8% YoY to 22,088 units. TAMO registered a decline of 17.8% YoY in the passenger vehicle segment in the domestic markets. The company is likely to launch ZICA (as per media reports, TAMO might reconsider the name of owing to outbreak of Zika virus), in the upcoming auto expo. The new launch might aid volume revival for the TAMO in the passenger car segment.
- Bajaj Auto and Hero MotoCorp Ltd (HMCL), the two leading two-wheeler manufacturers reported a flattish volume growth for the month of January 2016. Bajaj Auto reported a 1.8% Y-o-Y growth while HMCL reported a 0.8% Y-o-Y growth. On the contrary, rivals TVS Motor Company (TVS) and Royal Enfield (Eicher Motors) registered a super normal volume numbers. The total two-wheeler sales for TVS grew by 12.4% YoY aided by 19.9% Y-o-Y growth and 14.1% Y-o-Y growth in the motorcycle segment and scooters segment respectively. The scooters segment continues to exhibit traction, while the upcoming new launches, Victor and Apache, provided visibility on the motorcycle sales. Royal Enfield (Eicher Motors) registered a 65% Y-o-Y growth. Sales of its two-wheelers with engine capacity upto 350CC grew 71% YoY while vehicles with more than 350-CC capacity grew 11% YoY.
- The commercial vehicle segment continued to be driven by the MHCV segment, while the LCV segment exhibited a lacklustre performance. MHCV majors, TAMO and ALL, have posted 30.3% and 40% Y-o-Y growth respectively for the month in the domestic markets. Eicher Motors registered yet another month of strong volume sales, growing by 46.3% YoY in the domestic markets. The exports for Eicher Motors grew by 138.1% YoY on the lower base.
- In the tractor segment, the market leader M&M reported a 4% growth in domestic volumes however Escorts posted a decline of 4.2% YoY in the domestic markets.
- Picks: We continue to prefer MSIL, HMCL and ALL among the auto stocks under our coverage.
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