Shree Cement: Challenges lie ahead

While the company is seeing better realisations from the cement segment, increasing costs and subdued performance of power segment takes away part of the gains

The disappointment of the street on Shree cement’s quarter performance was visible in the stock price that corrected more than 2% on the bourses, closing at Rs 5,700 levels on Monday. The street was expecting the company’s operating performance to remain exceptionally good and beat estimates. In the backdrop, the stock price had run up a sharp 35% plus in the last two months. Though cement realisation got a boost, lower realisations from the power segment and increasing costs, especially the freight costs, dented overall operating performance of the company. The overall EBIDTA at around Rs 426 crore in the March quarter was lower than Bloomberg estimate of Rs 445 crore, which led to this disappointment.

Cement segment sees better realisations

Average cement prices in the North and Central India are estimated to have increased by about Rs 25 a bag sequentially as supplies got constrained due to the closure of Binani plant and a temporary closure of Ambuja cement’s Himachal plant, triggering price recovery. This bodes well for a regional player like Shree Cement. Even though prices in other regions did not recover much and prices in South India saw a declining trend, Shree cement having exposure to North and Central India accrued large benefits.

The company was able to dispatch 3.84 million tons of cement, much higher than 3.44 MT in the previous quarter and 3.26 MT in the year ago quarter. The cement revenues at Rs 1,487.42 crore increased 26% sequentially and 28.8% over year-ago period. Nevertheless the rise in transportation costs took the sheen away from this. The rise in freight and forwarding expenses (Rs 342.56 crore) went up by 43% y-o-y and 22% y-o-y respectively, leading the segment's EBIT fall of 3.4% over year-ago period.

Muted Power performance

Power business that contributes about 20% to revenues saw volumes at 536 million units, down 26% y-o-y due to sluggish demand for merchant power. The profitability from the segment was further affected as per unit power realization came at Rs 3.2 compared to Rs 3.4 in December’13 quarter. Per unit EBIDTA at 24 paisa per unit was much lower than 91 paisa in year ago quarter and 57 paisa in December’13 quarter.

Operating performance feels the heat

Overall EBIDTA at Rs 426 crore could grow only 5.1% y-o-y despite sales at Rs 1,660 crore, which grew 16.2% y-o-y. Margins at 25.7%, however, were much lower than year ago’s 28.4%. During the quarter, the company had extra-ordinary expenses of Rs 74 crore, which were offset by prior period tax credit of Rs 68 crore. Adjusted for the same, the company’s PAT fell by 17% y-o-y to Rs 228 cr. The reported PAT at Rs 222.5 crore was down 18.8% y-o-y and was much lower than consensus estimates of Rs 160 crore as per Bloomberg.

Outlook

Moving forward while the cement price hikes from February’14 bode well for the realisations, the risks on the same coming under pressure increase with Binani plant coming back on track. Further while cement demand from the infrastructure sector is going to get a boost after new government formation, but by the time new government is formed the seasonally soft period affected by monsoon is likely to have started. Thus any major revival in cement demand from here on will be only post the monsoon season ends.

Power demand and realisations too is likely to remain subdued in the near term, feel analysts. It is not surprising that analysts like V Srinivasan at Angel Broking maintains a Neutral rating on the stock post results. Sanjeev Singh at Centrum Broking though may revise his target price for the stock upwards, however, the same is likely to be below the current market price of the stock. Ravi Sodah at Elara Capital believes the company deserves premium valuations, due to its efficient cement operations, healthy balance sheet and favorable regional mix. Sodah has reiterated our accumulate rating and raised the target price to Rs 6,050 based on based on SOTP valuations. However, the same also means a limited upside for the stock from current levels.