Shree Cement: Bulls wallow in mortar

Despite near-term pressure on cement biz, strong efficiencies, rising capacities and power business are reasons analysts're positive

The Shree Cement stock, which had fallen 30 per cent from its high of Rs 5,200 during May-August, has risen 28 per cent since to Rs 4,374. Most cement stocks had fallen post-May due to extreme pessimism as demand and realisations came under pressure with the onset of monsoon. As a result, analysts estimate the September quarter results to be weak, with a sharp decline in net profit for most, including Shree. Nevertheless, and though the near term could see some pressure on demand and realisation in cement business, analysts are still positive on Shree. By Bloomberg, two of six analysts (who have rated the stock since September) have a ‘buy’ rating, three ‘accumulate’ and one ‘sell’, with a consensus target price of Rs 4,800.

Analysts say Shree’s fundamentals remain good, given the strong balance sheet, capacities going on stream and rising contribution from the power business. Hence, any correction can be looked as an opportunity to buy the stock from a one-two-year perspective.

Weak Q2
With cement prices in northern and central regions down year-on-year in September quarter due to the long spell of monsoon, analysts expect Shree to post a 5.6 per cent year-on-year fall in cement revenues. With the increase in freight cost, Ebitda a tonne at Rs 741 in cement business is expected to decline 37 per cent leading to a 28 per cent decline in total Ebitda to Rs 283 crore, compared to a year ago. However, power segment sales, are expected to see an increase in sales. Motilal Oswal Securities (MOSL) estimates merchant power sales to be up six per cent year-on-year at 325 million units and realisations stable.

As a result, net profit at Rs 86 crore is expected to decline 60 per cent year-on-year. However, most of this is already factored in considering analysts expected cement companies to post a sharp decline in profits.

Uptick in price, demand
However, there is some respite. The average all-India cement prices in September improved to Rs 299 a 50-kg bag compared to Rs 293 in August. Though the price recovery has been much stronger in south (Rs 26 a bag), west and north, too, saw a reasonable recovery of Rs 15 and Rs 10, respectively, by ICICI Securities’ channel checks. Price rises in north are relevant to Shree, largely a northern player. Though rises in the north have been slightly lower than the west, the trend is satisfactory, given monsoon in north is longer.

There has been some recovery in demand, too, feel analysts. The demand could have been better but for the start of festival season, a dampener as shortage of labour leads to slowing of construction. Nevertheless, analysts expect a good summer crop leading to a boost in cement demand. Also, the expected increase in infrastructure spending by the government before elections is likely to provide a boost in the second half of FY14. The real impact on demand will be visible from December/January, say experts.

Medium-term prospects
Medium-term prospects remain strong, says Amit Srivastava at Nirmal Bang Institutional equities. The company has a strong balance sheet and its power segment contribution is growing. It is setting up 2.5 million tonnes (mt) in new capacities in Chhattisgarh. This would take its cement capacity to 21.6 mt by June 2015, that too without stress on balance sheet, say analysts.

Analysts at MOSL say Shree would be generating an absolute Ebitda of Rs 1,580 crore (cement Ebitda of Rs 1,330 crore, rest from power) in FY14. This is comparable to that of larger peers like ACC or Ambuja’s estimated Ebitda of Rs 1,500 and Rs 1,800 for CY14, and much higher than (1.6 times) the next-largest player (Madras Cements) in mid-cap basket. They estimate Shree’s Ebitda to rise to Rs 1,780 crore in FY15.

This, with superior operating performance, strengthening of market mix, scale-up in size and strong balance sheet, make a strong case for further re-rating, on a par with larger players. Shree is trading at a 20 per cent discount to its larger peers, in terms of enterprise value to Ebidta. The target price by MOSL is Rs 5,400 for the stock trading at Rs 4,374. Of the six analysts polled by Bloomberg, three have a target price of over Rs 5,000.