3QFY2012 Result Update| Cement

January 31, 2012

Shree Cement
Performance highlights

NEUTRAL
CMP Target Price
% Chg qoq 47.3 66.8 310bp 53.8 3QFY2011 780 152 19.5 27 % Chg yoy 61.4 119.2 697bp 115.3

`2,255 -

Y/E Mar. (` cr) Net sales Operating profit OPM (%) Net profit

3QFY2012 1,259 332 26.4 59

2QFY2012 855 199 23.3 38

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others Abs. (%) Sensex SRCM

Source: Company, Angel Research

During 3QFY2012, Shree Cement (SRCM) posted 115.3% yoy growth in its bottom line to `59cr. Bottom-line growth was mainly driven by the cement business, which posted substantially higher realizations and reasonable 8.8% growth in volumes. PAT growth could have been higher, but it was restricted to a large extent by the sharp increase in depreciation cost (78.9% yoy) on account of capitalization of 150MW of new power capacity. We remain Neutral on the stock. OPM up by 697bp yoy, 310bp qoq: SRCMs total operating income grew by 61.4% yoy to `1,259cr, primarily on account of higher cement realization. The companys cement realization improved by 33.2% yoy to `3,794/tonne (up 11.4% qoq) on account of higher cement prices and higher cement sales as a proportion of total cement and clinker sales (98% in 3QFY2012 vs. 88% in 3QFY2011, as it had 1.5mtpa of incremental grinding capacity operational). Revenue of the power business also grew by 429% yoy to `177cr due to a 244% increase in sale volumes to 256.4MUs. This revenue included `66cr from power trading operations. The companys overall EBITDA margin expanded by 697bp yoy, as higher cement realization negated the cost pressures witnessed in freight cost and other expenses. Outlook and valuation: We expect SRCM to post a strong 23.8% CAGR in its top line over FY2011-13E, aided by an 8.9% CAGR in dispatches over the period. At the CMP, SRCM's cement business is trading at EV/tonne of US$84 on current capacity (US$59 on FY2013E capacity), which, when considering its unfavorable plant locations, in our view offers inadequate margin of safety. Hence, we maintain our Neutral recommendation on the stock.

Cement 7,857 0.7 2305/1505 5,824 10 17,194 5,199 SHCM.BO SRCM@IN

64.8 5.0 8.7 21.5

3m 1yr 3yr (2.9) (6.2) 82.4 18.9 35.9 353.1

Key financials
Y/E March (` cr) Net Sales % chg Net Profit % chg FDEPS(Rs) OPM (%) P/E(x) P/BV(x) RoE(%) RoCE(%) EV/Sales (x) EV/EBITDA Source: Company, Angel Research FY2010 3,642 34.2 676 17.0 194.0 39.5 11.6 4.3 45.2 26.2 1.9 4.8 FY2011 3,512 (3.6) 210 (69.0) 74.1 25.2 30.4 4.0 13.5 5.4 2.0 8.0 FY2012E 4,497 28.0 237 12.9 68.0 25.3 33.2 3.6 11.3 8.9 1.6 6.2 FY2013E 5,383 19.7 421 77.6 120.7 26.1 18.7 3.1 17.7 15.8 1.1 4.4

V.Srinivasan
+91 22 39357800 Ext. 6833 v.srinivasan@angelbroking.com

Sourabh Taparia
+91 22 39357800 Ext. 6872 sourabh.taparia@angelbroking.com

Please refer to important disclosures at the end of this report

Shree Cements | 3QFY2012 Result Update

Exhibit 1: 3QFY2012 performance (Standalone)

Y/E March (` cr) Total Operating Income Net raw-material costs (% of sales) Power & fuel (% of sales) Staff costs (% of sales) Freight & forwarding (% of sales) Other expenses (% of sales) Total Expenditure Operating Profit OPM (%) Interest Depreciation Other Income PBT Provision for Taxation (% of PBT) Reported PAT PATM (%) EPS (`)
Source: Company, Angel Research

3QFY2012 1,259 156 12.4 325 25.9 64 5.1 266 21.1 115 9.1 926 332 26.4 37 235 2 62 3 4.9 59 4.7 17

2QFY2012 855 109 12.7 203 23.8 59 4.7 192 15.3 92 7.3 655 199 23.3 29 162 2 11 (28) (256.8) 38 4.5 11

% Chg qoq 47.3 43.8 60.1 7.7 38.3 24.8 41.3 66.8 310bp 27.5 45.2 (24.1) 476.6 53.8 53.8

3QFY2011 780 88 11.3 207 26.5 48 3.8 202 16.0 84 6.6 628 152 19.5 20 131 2 2 (26) (1,427.2) 27 3.5 8

% Chg yoy 61.4 77.5 57.4 33.2 31.7 37.6 47.5 119.2 697bp 81.7 78.9 (1.0) 3,356.4 115.3 115.3

9MFY2012 3,147 394 12.5 802 25.5 184 5.9 681 21.6 310 9.7 2,365 782 24.9 98 557 4 132 (20) (15.4) 153 4.9 44

9MFY2011 2,442 305 12.5 610 25.0 145 5.9 544 22.3 262 10.7 1,866 576 23.6 64 411 44 145 1 0.5 144 5.9 41

% Chg 28.9 29.2 31.3 27.3 25.2 16.0 26.7 36.0 129bp 52.3 35.5 (90.0) (8.6) 6.1 6.1

Exhibit 2: Financial performance

(` cr) 1,200.0 1,000.0 800.0 600.0 400.0 200.0 0.0 2QFY11 3QFY11 4QFY11 1QFY12
Net Profit

1,259 1,070 780 1,034 855

(%) 29.0 27.0 25.0 23.0 21.0 19.0

718

11

27

66

55

38 2QFY12

59 3QFY12

17.0 15.0

Total operating income

OPM (RHS)

Source: Company, Angel Research

January 31, 2012

Shree Cements | 3QFY2012 Result Update

Exhibit 3: 3QFY2012 Actual vs. Angel estimates

(` cr) Net sales Operating profit Net profit
Source: Company, Angel Research

Actual 1,259 332 59

Estimates 1,082 279 76

Variation (%) 16.3 19.0 (21.7)

Performance highlights
Total operating income up 61.4% yoy, led by strong growth in cement business
During 3QFY2012, SRCMs total operating income grew by 61.4% yoy to `1,259cr, primarily on account of higher cement realization. The companys cement realization improved by 33.2% yoy to `3,794/tonne (up 11.4% qoq), on account of higher prices as well as higher cement sales as a proportion of total cement and clinker sales (98% in 3QFY2012 vs. 88% in FY2011 as 1.5mtpa of incremental grinding capacity was operational). Cement dispatches also grew by 8.8% yoy to 2.85mn tonnes. Revenue of the power business also grew by 429% yoy to `177cr due to a 244% increase in sale volumes to 256.4MUs. This revenue included `66cr from power trading operations. Power volumes growth was aided by 150MW of new capacity commissioned during the quarter.

Freight costs spiked, but much higher cement realization aided improvement in overall OPMs
Although SRCM faced margin pressures during the quarter due to higher freight cost and other expenses, substantial growth in cement realization and higher revenue from the power division resulted in OPM expanding by 697bp yoy to 26.4%. Even on a sequential basis, the companys margin improved by 310bp due to higher realization, which negated the surge in costs faced by the company.

Per tonne analysis

On the operating front, raw-material cost per tonne of cement was flat yoy, while it fell by 23.4% qoq. Power and fuel cost per tonne increased by 10.8% yoy; however, it reduced by 2.3% qoq on account of moderation in pet coke prices. Freight cost/per tonne rose by 21.1% yoy on account of inter-unit clinker transfer to incremental grinding unit at Jaipur in Rajasthan (1.5mtpa) and higher diesel cost. Operating profit per tonne of the cement increased to `1,113 (100.2% yoy).

January 31, 2012

Shree Cements | 3QFY2012 Result Update

Exhibit 4: Cement operational performance

Particulars (`) Realization/tonne Raw material cost/tonne Power & fuel cost/tonne Freight cost/tonne Other costs Operating profit/tonne Source: Company, Angel Research 3QFY2012 2QFY2012 3QFY2011 chg (%) yoy chg (%) qoq 3,794 328 798 932 403 1,113 3,405 428 817 771 370 800 2,848 329 721 769 319 556 33.2 (0.3) 10.8 21.1 26.5 100.2 11.4 (23.4) (2.3) 20.9 9.1 39.1

Exhibit 5: Segment-wise revenue break-up

Particulars (` cr) Cement Power 3QFY2012 1,081 177 2QFY2012 848 7 3QFY2011 746 34 chg (%) yoy 44.9 429.2 chg (%) qoq 27.5 2,469.2

Source: Company, Angel Research

January 31, 2012

Shree Cements | 3QFY2012 Result Update

Investment rationale
One of the lowest-cost cement producers: SRCM is one of the lowest-cost cement producers in north India, primarily because of its captive power plant and lesser power consumption per tonne of cement (one of the lowest in the industry due to higher proportion of PPC (~80%) in overall sales volumes) and lower freight cost as its grinding units are close to demand centers. Growth to be driven by capacity addition: SRCM has recently added 3.3mtpa of cement capacity by commissioning new grinding plants and by de-bottlenecking. The company has also commissioned new merchant power capacity of 300MW in two phases in October 2011 and January 2012. We expect these capacity additions to drive its revenue growth going ahead. Relatively unfavorable plant locations amongst our coverage companies: SRCM

has 87% of its total capacity located in Rajasthan, which is expected to face prolonged utilizations and margin pressures, as state-wise it is Indias second biggest capacity cluster (44.8mtpa of total capacity in FY2011) and has huge demand supply gap even after catering to surplus demand of nearby states (Punjab, Haryana, Chandigarh, NCR and UP), in addition to its own demand.
The balance 13% capacity is in Uttarakhand, where demand supply dynamics are much better than Rajasthans and, hence, capacities in the state are expected to witness higher utilizations. Outlook and valuation: We expect SRCM to post a strong 23.8% CAGR in its top line over FY2011-13E, aided by an 8.9% CAGR in dispatches over the period. At the CMP, SRCM's cement business is trading at EV/tonne of US$84 on current capacity (US$59 on FY2013E capacity), which, when considering its unfavorable plant locations, in our view offers inadequate margin of safety. Hence, we maintain our Neutral recommendation on the stock.

Exhibit 6: Change in estimates

(` cr) Earlier Net Sales Operating Exp Operating Profit Depreciation PBT Tax PAT
Source: Angel Research

FY2012E Revised 4,497 3,358 1,138 798 221 (16) 237 Var. (%) 5.6 3.0 13.9 19.7 (15.0) (4.0) Earlier 5205 3897 1309 747 542 108 434 4,260 3,260 999 667 260 13 247

FY2013E Revised 5,383 3,979 1,404 828 526 105 421 Var. (%) 3.4 2.1 7.3 10.9 (3.1) (3.1) (3.1)

January 31, 2012

Shree Cements | 3QFY2012 Result Update

Exhibit 7: One-year forward EV/tonne

90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 EV/tonne US$70 US$90 US$110 US$130

EV(` mn)

Apr-01

Apr-02

Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Oct-01

Oct-02

Oct-03

Oct-04

Oct-05

Oct-06

Oct-07

Oct-08

Oct-09

Oct-10

Apr-11

Source: Company, Angel Research

Exhibit 8: Recommendation summary

Company ACC* Ambuja Cements* India Cements JK Lakshmi Cement Madras Cements Shree Cement UltraTech Reco Neutral Neutral Neutral Accumulate Neutral Neutral Neutral CMP (`) 1,190 161 81 47 117 2,255 1,211 Tgt. Price (`) 51 Upside (%) 7.9 FY2013E P/BV (x) 2.8 2.7 0.7 0.5 1.2 3.1 2.3 FY2013E P/E (x) 17.6 17.5 8.8 6.1 7.7 18.7 14.6 FY2011-13E EPS CAGR 6.4 6.9 165.3 53.9 31.1 27.6 27.1 FY2013E RoCE (%) 20.9 20.4 7.2 7.5 12.8 15.8 17.5 FY2013E RoE (%) 16.7 16.5 8.0 8.3 16.5 17.7 17.1

Source: Company, Angel Research; Note: December year ending

January 31, 2012

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Shree Cements | 3QFY2012 Result Update

Profit and loss statement

Y/E March (` cr) Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of net Sales) Depreciation& Amortization EBIT % chg (% of net Sales) Interest & other Charges Other Income (% of PBT) Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2008 FY2009 FY2010 2,108 50.3 1,284 225 367 74 618 824 37.8 39.1 479 346 109.1 16.4 56 78 21.3 368 88.2 368 108 29.3 260 41.6 12.3 75 75 41.6 2,715 28.8 1,793 262 606 104 821 922 11.9 34.0 205 717 107.5 26.4 77 83 11.5 723 96.3 723 145 20.1 578 122.0 21.3 166 166 122.0 3,642 34.2 2,204 313 610 159 1,121 1,439 56.0 39.5 570 868 21.1 23.8 129 129 14.8 868 20.1 868 192 22.1 676 17.0 18.6 194 194 17.0 FY2011 FY2012E FY2013E 3,512 (3.6) 2,626 401 912 199 1,114 886 (38.4) 25.2 676 210 (75.8) 6.0 175 124 78.2 159 (81.7) 48 110 (99) (90.0) 210 (61.8) 7.4 74 74 (61.8) 4,497 28.0 3,358 542 1,156 245 1,415 1,138 28.5 25.3 798 341 62.2 7.6 199 79 36.0 221 38.9 221 (16) (7.3) 237 (8.3) 5.3 68 68 (8.3) 5,383 19.7 3,979 596 1,493 270 1,619 1,404 23.3 26.1 828 576 69.0 10.7 143 93 17.7 526 138.2 526 105 20.0 421 77.6 7.8 121 121 77.6

January 31, 2012

Shree Cements | 3QFY2012 Result Update

Balance sheet
Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders funds Total loans Deferred tax liability Total Liabilities APPLICATION OF FUNDS Gross block Less: acc. depreciation Net Block Capital work-in-progress Goodwill Investments Current Assets Cash Loans & advances Other Current liabilities Net Current Assets Misc. exp. not written off 2,187 1,427 760 18 591 1,112 484 403 226 496 616 2,256 1,629 627 479 845 1,466 509 744 213 721 745 2,951 2,199 752 967 1,592 1,582 416 725 441 967 615 4,042 2,875 1,167 1,028 1,196 1,439 461 466 512 908 531 5,242 3,673 1,569 78 1,546 1,484 740 199 545 970 514 5,442 4,501 941 78 1,846 1,725 791 245 689 1,021 704 35 638 673 1,331 (18) 1,985 35 1,175 1,210 1,496 (10) 2,696 35 1,798 1,833 2,106 (12) 3,927 35 1,951 1,986 2,008 (72) 3,922 35 2,155 2,190 1,608 (90) 3,708 35 2,517 2,552 1,108 (90) 3,570 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

Total Assets

1,985

2,696

3,927

3,922

3,708

3,570

January 31, 2012

Shree Cements | 3QFY2012 Result Update

Cash flow statement

Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc)/ Decin Fixed Assets (Inc)/ Dec in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Cash Flow from Financing Others Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E 368 479 (476) 78 124 169 (204) (541) 78 (667) 399 33 367 (131) 615 484 723 205 (80) 83 164 601 (254) 83 165 41 125 25 484 509 868 570 33 129 190 1,152 (747) 129 610 53 557 (92) 509 416 110 676 98 124 (71) 831 396 124 (631) (98) 57 (155) 44 416 461 221 798 295 79 (16) 1,250 (250) (350) 79 (521) (400) 33 (433) 18 279 461 740 526 828 (139) 93 105 1,017 (200) (300) 93 (407) (500) 59 (559) 51 740 791

(530) (1,183) (1,152)

(700) (1,802)

January 31, 2012

Shree Cements | 3QFY2012 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.) 0.4 0.3 6.2 0.1 0.2 9.3 0.1 0.1 6.7 0.2 0.4 1.2 (0.3) (0.6) 1.7 (0.6) (1.1) 4.0 1.1 29 7 147 1 1.2 22 7 124 25 1.4 26 7 140 22 1.0 40 10 130 14 1.0 34 9 102 (6) 1.0 33 9 91 (11) 20.2 52.3 49.2 30.6 81.7 65.0 26.2 95.7 45.2 5.4 19.2 13.5 8.9 26.4 11.3 15.8 52.4 17.7 16.4 70.7 1.8 21.0 3.5 1.2 42.1 26.4 79.9 1.5 31.1 4.4 0.9 55.9 23.8 77.9 1.3 23.7 5.6 0.9 40.9 6.0 190.0 1.0 11.4 16.2 1.0 6.8 7.6 107.3 1.4 11.4 11.8 0.8 11.0 10.7 80.0 1.9 16.0 8.4 0.5 19.8 74.7 74.7 212.1 9.4 177.4 165.9 165.9 224.8 11.7 333.2 194.0 194.0 357.8 15.2 526.2 74.1 74.1 254.2 16.3 570.1 68.0 68.0 297.0 9.5 628.6 120.7 120.7 358.5 16.8 732.5 30.2 10.6 12.7 0.4 3.8 9.8 4.1 13.6 10.0 6.8 0.5 2.8 8.1 2.8 11.6 6.3 4.3 0.7 1.9 4.8 1.8 30.4 8.9 4.0 0.7 2.0 8.0 1.8 33.2 7.6 3.6 0.4 1.6 6.2 1.9 18.7 6.3 3.1 0.7 1.1 4.4 1.7 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

January 31, 2012

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Shree Cements | 3QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Shree Cement No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

January 31, 2012

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