Shree Cement: Well placed to ride the recovery

Though soft realisation had an impact on performance in Sept quarter, capacity expansion and expected demand & realisation recovery should boost its prospects

Impact of benign cement realisations was visible on most cement players who have reported their December’14 quarter performance. Volume growth and boost from the power segment provided a cushion to Shree Cement which also witnessed softer cement realisation. With revenues at Rs 1,542 crore and Ebidta at Rs 303 crore coming marginally lower than Bloomberg consensus estimates of Rs 1,551 crore and Rs 307 crore respectively due to cement segment’s subdued profitability, the stock corrected 3.17 per cent to close at Rs 10,483 on Wednesday. Shree Cement’s accounting year ends in June.

In the December’14 quarter, cement prices had corrected as demand weakened due to festival season in October and November before starting to rebound in December. The prices thereby made up for the losses in Northern region by January. While South has also seen price hikes in anticipation of demand recovery, demand growth in relation to excess capacities is still a cause of concern.

Shree Cement’s dispatches at 3.81 million tonnes (MT) grew 10 per cent over December’13 quarter and was flat sequentially. However, realisation came lower at Rs 3,540 a tonne for the quarter, three per cent down sequentially though 3.2 per cent up year-on-year. Merchant power realisations at 3.92 a unit though flat sequentially were up 16 per cent year-on-year. But, unit sales at 491 million units grew about 20 per cent. Thus, merchant power revenue was up 40 per cent year-on-year to Rs 190 crore compared to Rs 150 crore estimated by analysts as Sanjeev Kumar Singh at Emkay Global. Though just 12-13 per cent of sales and profits, power segment’s Ebitda per unit that increased 44 per cent year-on-year to Rs 0.59 helped make up for the subdued growth in cement Ebidta per tonne. The latter at about Rs 728 came lower than previous quarter’s Rs 826 and marginally higher than Rs 716 in the year ago period.

Moving forward, the prospects of cement manufacturers’ hinge on demand growth, which analysts remain optimistic of. Analysts at Nomura feel that from demand side, the government’s thrust on providing permanent houses for all by 2022 has the potential to push cement volume growth to about 10 per cent (by FY17). “Overall, this means that the industry could attain better pricing power much earlier than our expectations,” they said.

Shree Cement is adding capacities too. The capacities are to expand to 23 MT by end of FY16 from a base of 13-14 MT at the end of FY14 after its green-field expansions in central and east India get commissioned. With this, the company will partly de-risk its business model from being entirely dependent on North India to exposure to other parts of the country. Analysts at Nomura feel that better realisations in this region compared to the North offers a lever to improve profitability. They arrive at a SOTP (sum-of-the-parts) based target price of Rs 12,264. Consensus target price as per analyst polled in last two days on Bloomberg stands at Rs 10,860.

Analysts at Religare, too, maintain Buy as planned expansion with regional diversification should drive a revenue and Ebitda CAGR of 20 per cent and 28 per cent over FY14-FY17. They also expect cost efficiency and a strong balance sheet will continue to cushion investors.

Amongst the players who have declared results so far, cost efficiencies and rising cement volumes have helped Shree Cement and UltraTech amongst large players, whereas ACC had to bear the brunt of higher costs and reported lower than expected volumes. On the back of lower realisations and suspension of limestone mining in Jharkhand and Odisha, ACC’s operating performance took a hit. Analysts at Prabhudas Liladher add that owing to higher exposure to southern and western regions (impacted by overcapacity and low utilisations), they expect delayed recovery in ACC’s margins. However, generally, looking at beaten down valuations of ACC, analysts expect some upturn in stock prices. Analysts at Motilal Oswal Securities say at $123/tonne (over 30 per cent discount to large cap average) the stock can rebound to Rs 1,690 (CMP- Rs 1,498.30). Shree Cement is trading at replacement costs of $260 a tonne and UltraTech at about $225 a tonne. A correction could be a good entry point in these stocks.