Shree Cement's superior Q2 show will help sustain premium valuations

With the company's cost leadership being maintained, it reported much better per tonne operating profit

Shree Cement’s superior showing for the July-September quarter (second quarter, or Q2) topped the strong performance posted by most large-cap cement players.

On sales volume, Shree Cement posted a stronger growth of 14 per cent year-on-year (YoY) to 6.53 million tonnes (mt). Sales volume surged 36 per cent over the lockdown-impacted April-June quarter.

Earlier, UltraTech, though a pan-Indian player, on a much higher base had reported an increase of 8 per cent in volume to 18.52 mt for domestic operations.

Ambuja Cements (more comparable to Shree Cement) had seen similar growth in volume to 5.67 mt, while ACC reported marginal increase to 6.49 mt.

Clearly, Shree Cement leads the pack in terms of sales volume growth. Apart from volume, stronger realisations, cost controls, and lower input costs - that have been helping all cement players - propped up Shree Cement. The company's realisations were firm and ahead of analysts’ estimates.

Binod Modi at Reliance Securities said the reported average per tonne realisation at Rs 4,555 was Rs 95 higher than his estimates.

Helped by strong volume growth and firm realisations, Shree Cement's income from operations grew 8 per cent YoY (31 per cent sequentially) to Rs 3,249.93 crore in Q2. The lower input costs and control over expenses provided further impetus to the operating performance.

Operating cost per tonne at Rs 3,046 declined 5 per cent YoY and 7 per cent sequentially. This was helped by declining fuel costs (down 19 per cent YoY), which took care of the rising freight costs as well.

According to Emkay Global, the per-tonne variable costs and energy expenses were the lowest in 13-15 quarters. Earnings before interest, tax, depreciation, and amortisation (Ebitda) thereby grew 17 per cent YoY and 41 per cent sequentially to Rs 999.73 crore, and beat Street estimates.

The Ebitda per tonne at Rs 1,510 improved over Rs 1,451 reported in the year-ago quarter and Rs 1,422 in the previous quarter.

The per-tonne Ebitda was also much better than UltraTech’s Rs 1,343 and Lafarge Holcim Group companies – Ambuja and ACC’s Rs 1,111 and Rs 918, respectively.

The significantly better per-tonne profitability of Shree Cement justifies the premium stock valuation it commands over large-cap peers. The company's profit before tax at Rs 729.51 crore jumped 79.6 per cent YoY, while net profit at Rs 527.8 crore grew 68.4 per cent and came much ahead of analysts’ estimate of Rs 371.4 crore.

Moving forward, further improvement in realisation and recovery in demand remain positive for cement players. The demand improvement has been better than Street expectations and has been helped by good rural demand, while infrastructure demand is also recovering with better labour availability. Shree Cement's management expects demand to grow 7-8 per cent annually.

The company’s volumes and market share are expected to be strengthened with the start of 3-mt grinding units each at Athagarh in Odisha and at Pune in Maharashtra in the second half of 2020-21. The company had a little over 40 mt of cement capacity at the end of 2019-20.

It has aggressive capacity expansion plans and aims to double capacity in six to seven years. Capacities are expected to touch the 57-mt mark in the next three years, and 80 mt in six years.

The timely expansions have been one of the reasons driving the company’s growth. Analysts feel the company can meet its capital expenditure requirements, while expansions will accrue positives.

“With Shree Cement’s cost leadership being maintained, this will aid the company to sustain premium valuations,” said Modi, adding that the recent rise in realisations and volume traction in key markets were likely to aid profitability.