Shree Cement: Rising costs take the sheen off Q4 show

Strong volumes and realisations offset some of the cost pressures

Higher costs dented the performance of Shree Cement in the March quarter (Q4). The surge in fuel and transportation costs resulted in standalone operating profit coming in at Rs 511 crore, lower than the Bloomberg consensus estimates of Rs 558 crore.

While Street expectations weren’t high, given soft cement prices and power realisations, the performance did not match even the muted estimates. Merchant power demand has not been encouraging, leading to tariffs declining sharply. The power segment, which posted losses at the operating level in the December quarter, reported an operating profit of Rs 26 crore in Q4, and this was broadly in line with expectations.

The disappointment was largely in the cement segment. Analysts were expecting the segment to report an operating profit per tonne of over Rs 900, while the company managed to report about Rs 818 per tonne. This is primarily due to a rise in freight rates. Power and fuel costs also rose significantly (54 per cent sequentially), given the spike in coal and pet coke prices. Freight and forwarding costs, too, saw a similar rise, taking a toll on the Q4 show. Peers ACC and Ambuja have seen a similar trend. While UltraTech had been able to manage its costs better so far, they could feel the cost pinch, given the rising coal and pet coke prices.

The company reported good volume growth, which came in at an 11 per cent on a year-on-year basis. On a sequential basis, the growth was 22 per cent, which is encouraging, indicating the impact of the note ban has been fading and demand is improving. Higher volumes helped it report revenue of Rs 2,683 crore, better than the consensus estimates of Rs 2,295 crore. The per tonne realisations, at Rs 3,770, also improved, from Rs 3,699 in Q3. It is the realisations trend that the Street will be watching, as it can offset some of the cost pressure.

With the hike in prices, the disappointment on profitability during the March quarter may not lead to a significant correction in stock price. Analysts at Kotak Institutional Equities indicated the strong pricing action across regions gives visibility to earnings forecast, though they will review estimates after the results. 

Most analysts feel any major correction after the soft results may be looked at as an opportunity to buy.