STOCK PITCH – SHREE CEMENT

9th Feb,2017

Shree Cement is a Buy | Target: 21424, Current: 15870

BUY SHREE CEMENT

Highest 10 year Sharpe Ratio among peers

Strong Past Track Record

Favourable Macroeconomic Environment in longer term

Under-priced Stock

Highest operating margin leading to higher PE multiple

Strong Business Fundamentals

Trend Analysis: Stock trading below 150 day moving average

3

Indian macroeconomic environment favorable for cement industry

10th plan

11th plan

12th plan

5.20%

7.20%

9.00%

Infra Spending as % of GDP Power, Roads, Railways, Irrigation, Urban Infra

Cyclical Industry

1981 1986 1991 1996 2001-113579

111315

Growth(%)

Infra spending to aid growth

Housing; 67%

Infrastructure; 12%

Commercial; 20%

Industrial; 9%Housing major demand driver

Demonetization effect not as severe as anticipated

Allocation increased by 39% to INR 290 billion

Rural Development ministry budget up by 10%

Strong push in Budget 2017

Demand triggering higher capacity expansion and operating rates

2011 2012 2013 2014 2015 2016 2017E 2020E0

100

200

300

400

500

600

66%

68%

70%

72%

74%

76%

78%

80%

Demand Supply Rela-tionship

Cement production (MT) Capacity (MT)Operating Rate

4

600 700 800 900 1000 110034

36

38

40

42

44

46

Ultratech

Shree Cement

Ambuja

ACC

P/E multiple vs EBIDTA/Ton

EBDITA/Ton

P/E

Shree Cement best positioned among peers to capitalize on favorable trends in the industry

Ultratech Shree Ambuja ACC0

102030405060708090

100

19 23 16 13

21 11 22 18

18 20 2220

26 24 2125

66 6 7

10 16 13 17

Cost Leadership

Operating Profit Material Cost Power an fuel costSelling and Distribution Employee cost Other operating cost

0.38

0.42

0.45

0.53

0.60

10 Year performance - Sharpe Ratio

Shree Cement has highest operating margin driven by lowest material costs

ACC

Ambuja S&P BSE Ultra Tech

Shree Cement Shree Cement delivered higher rewards per risk over past 10 years

P/E PriceShree Cement 43.9 15850

Industry 51.5 18590

Shree Cement undervalued as per FCFE valuation

13895 15870Defensive Actual

D efensive Act ua l B a la nced0

5000

10000

15000

20000

25000Shree Cement Stock estimate

21424Balanced

15870 21424

74.1%

Current Stock Price Predicted Stock Price

Percentage underpriced

Cost of Capital

Current ratio of 4.95; expected to go up-to 15.63 which is Ultratech’s ratio. No investment in terminal stage.

High gestation period

High terminal ROIC of 16% as per balanced model

The stock is a Long term Buy as per FCFE and P/E estimates. Estimates go below current levels on assumption of worst case short term revenue growth of 6%.

Revenue Growth Rates Operating Margin Rates

Sales to Capital

Assumed 3 stages of revenue growth

Current growth of 16% for 6 years, intermittent rate of 5% for last 3 years and terminal economic growth of 2%

Risks of delayed implementation, inter-linkage with GDP growth, seasonal and cyclical

Current Cost of Capital of 15.28%

At mature stage, cost of capital is that of market investment (8.82%)

Change in company beta value with maturity and change in market risk not taken into consideration

Shree cement has best in class op. margin rate of 25.86%

At terminal stage, the margin is estimated to be 20.12% (Ultratech)

Sustainability of cost advantages

High utilization even after expansionEst

Questions?

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7

1 20%

20%

40%

60%

80%

100%

120%

20% 20%

23% 22%

19% 21%

21% 22%

17% 15%

Region Wise Demand

North South East West Central

6-7% CAGR

5-6% CAGR

9-10% CAGR

5.5-6.5% CAGR

6-7% CAGR

2015-2016 2020-20216.5-7.5% CAGR

Back Up: Regional Demand

8

9

Indian macroeconomic environment favorable for cement industry

10th plan

11th plan

12th plan

5.20%

7.20%

9.00%

Infra Spending as % of GDP Power, Roads, Railways, Irrigation, Urban Infra

Cyclical Industry

1981 1986 1991 1996 2001-113579

111315

Growth(%)

Infra spending to aid growth

Housing; 67%

Infrastructure; 12%

Commercial; 20%

Industrial; 9%Housing major demand driver

Demonetization effect not as severe as anticipated

Allocation increased by 39% to INR 290 billion

Rural Development ministry budget up by 10%

Strong push in Budget 2017 Government Mind