Shree Cement’s (SRCM) Q3FY11 results were disappointing with drop in realisations and negligible power sales wiping out profits. Average cement realisations slumped 13% YoY to Rs2.8k/mt, while EBITDA/mt halved to Rs590. Margins contracted 1,844bps YoY to 20.3% as against our estimate of 22.8%. Higher capital charges resulted in PBT of Rs77mn. A tax write back enabled the company post a net profit of Rs275mn as against our estimate of Rs699mn.

Volumes recover however realisations go for a toss: After hitting a low in Q2FY11, volumes recovered in the current quarter growing 13.8% sequentially to 2.4mn mt. Clinker sales were also higher at 0.3mn mt. However, growth in volumes was achieved at the cost of lower realisations which declined 7.7% QoQ to Rs2,800/mt. The proportion of non trade segment sales was at 30%. Cement segment sales were lower by 9.4% YoY at Rs7.5bn.

Power offtake improves: Power business continued to be a laggard, however QoQ power volumes improved by 47% to 74mn units. Power segment sales stood at Rs320mn. The company has entered into a contract for 100mw till Jul’11. Power sales are expected to pickup in Q4FY11 with the onset of summer season in the country.

Drop in realisations hampers margins: The cost pressures faced in Q2FY11 continued during the quarter with raw material and fuel playing spoilsport. Power and fuel cost per mt of cement increased 26.3% YoY with petcoke prices rising above Rs7k/mt. The volume growth during the quarter helped expand margins QoQ by 50bps to 20.3%. On a YoY basis margins contracted by 1,840bps. With higher capital charges, the company was barely able to break even at PBT level. A tax reversal helped the company post a net profit of Rs275mn.

Outlook: We have lowered our cement volume estimates for FY11 and FY12 by 5% respectively. Considering the lower cement realisations and cost pressures faced, we have reduced our margin estimates for FY12 by 740bps. Consequently our revised EBITDA estimate for FY12 is lower by 23%. Our earnings estimate for FY12 is Rs93.

VALUATIONS AND RECOMMENDATION

The stock is currently trading at 5.4x FY12E EV/EBITDA. Although the current scenario for cement is bleak we expect an improvement from Q3FY12 onwards. Hence, we reiterate our ‘BUY’ recommendation on the stock with a revised target price of Rs1,999 (earlier 2,580) discounting FY12E EBITDA 6.5x.