Shree Cement's March quarter shows why it commands rich valuations

Highest margins, strong balance sheet, high free cash flow are well priced in

Despite the Covid-19-led challenges, Shree Cement reported its highest-ever profitability in its mainstay cement business and better-than-expected earnings for the March quarter (Q4). The improvement in the profitability also helped offset the fall in volumes, and was led by higher realisations and cost leadership. Following the results posted on Friday after market hours, the stock has gained 2 per cent, even as the markets remained down.

Realisations improved as prices in the north and central India, where Shree has high exposure, were better than in other regions. Reported realisations at Rs 4,625 per tonne were up 9.5 per cent year-on-year (YoY) and 2.5 per cent sequentially. This lifted the overall performance, even as cement volumes at 6.91 million tonne (MT) fell about 5 per cent YoY -- the first for the company in 18 years, due to the lockdown-led disruption. However, the volume decline was lower than the 10-12 per cent fall reported by ACC and Ambuja Cements.

 

 

Better realisations cushioned net sales, which at Rs 3,218 crore declined just 2 per cent YoY. Realisations, coupled with lower operating costs, boosted margins. Fuel costs, too, declined because of softer petcoke, coal, and diesel prices. As employee costs also were under check following a cut in the remuneration of top management, earnings before, interest, tax, depreciation and amortisation (Ebitda) jumped 27 per cent YoY to Rs 1,080 crore. Binod Modi at Reliance Securities said this was ahead of his estimates of Rs 1,040 crore.

In the cement business, Ebitda per tonne was the highest-ever at Rs 1,562, up from Rs 1,103 a year-ago and Rs 1,365 in Q3, according to analysts. ACC had reported per tonne Ebitda of Rs 741, and Ambuja of Rs 928.

Helped by higher other income and lower taxes, net profit at Rs 588 crore was up 83.3 per cent YoY, even as the power business (less than 10 per cent of the revenue) performance was subdued.

Shree Cement's best-in-industry profitability helps it command rich valuations. The current prices imply a replacement cost, based on the FY21 enterprise value (EV) per tonne, of $190 compared to UltraTech's $127, ACC's $68, and Ambuja’s $100. This also means there is little room for upside in the current environment, wherein cement volumes are expected to fall 18-21 per cent in FY21, and demand is estimated to see some recovery from the December quarter.

While factors, such as a strong balance sheet and limited capex (so high free cash flow) provide comfort, the same remains factored in stock price. Emkay Research says valuations at 27.2x FY21 estimated EV/Ebitda leave no room for negative surprises.