Core business eases power segment pain for Shree Cement in Dec quarter

Cost controls, presence in profitable markets increase earnings

Muted performance by the power division was responsible for a lower-than-expected December quarter (Q3) performance by Shree Cement. However, its cement division performed better, offsetting some of the pain in the power business. Higher exposure to the more profitable North India region helped the company report better realisations than other cement peers. Profitability per tonne reported by the company at Rs 1,365 was much higher than UltraTech’s and ACC’s at Rs 1,008 and Rs 697, respectively.

UltarTech and ACC, being pan-Indian players, saw a bigger impact of sluggish all-India cement prices, with West, South, and East India witnessing a decline by Rs 10-17/50 kg bag, sequentially. In comparison, Shree Cement’s higher exposure to North and Central India helped it perform better, as the realisation decline was only Rs 3-4/50 kg bag.

However, the muted power business performance (about 10 per cent of overall business) led to a fall in the segment revenue and profit by 40-50 per cent because of lower units sold amid weak merchant power demand.  This meant that the company’s overall performance was weak. Revenues at Rs 2,848.34 crore came lower than consensus analyst estimates of Rs 2,937.5 crore. Better cost control helped operating and net profit meet consensus estimates.

The company had raised Rs 2,383 crore through a QIP in Q3, to be used for capacity expansion, working capital needs, and debt repayment. The grinding units of 3 million tonnes each in Cuttack and Pune would be commissioned over the next three quarters. Binod Modi of Reliance Securities says that Shree Cement has been moving in the right direction in its pursuit to dominate key markets by adding capacity at regular intervals, which will aid its efforts in growing its market share without much stress on its balance sheet. 

However, in the near term, the company’s growing capacities in East India, where a large number of capacities are already being added, may lead to subdued realisations. Analysts at Emkay Research say that valuations at 20.3x its enterprise value to operating profit estimates for FY21 are expensive, and leave little room for disappointment. While the stock trades at Rs 24,030, target prices are in the range of Rs 23,500- Rs 24,434.