Weak demand outlook to keep a check on Shree Cement's stock

Cement segment's gains came in line with estimates, overall profits were below expectations due to lower other income

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Shree Cement, the only stock in the segment that has held on since October, saw high volatility on Monday after posting results for the second quarter ending December 2013 (Q2).

The company, which follows a July-June financial year, saw its stock touch an intra-day low of Rs 4,100 before closing at Rs 4,326, down 1.6 per cent over the previous closing. The reason: though profits at Rs 115.5 crore disappointed the Street, as consensus Bloomberg estimates stood at Rs 142 crore, a closer look reveals it was largely due to lower other income.

Operationally, though, the performance has been largely in line with the expectations. Ebitda of Rs 271 crore was just marginally lower than Bloomberg consensus expectation of Rs 275 crore, and so were sales at Rs 1,317 crore versus estimates of Rs 1,346 crore. The power segment, which contributes 26 per cent to overall revenues in FY13, saw strong gains in profitability even as sales fell during the quarter.

In this weak environment wherein cement demand and realisations remain subdued, it was remarkable to see the volume grow. At 3.43 million tonnes (mt), these were much better than the year-ago quarter’s 3.26 mt and previous quarter’s 3.13 mt. Lower realisations, however, capped the segment’s revenue growth at 8.4 per cent (Rs 1,180 crore). Average cement prices in North India (where Shree Cement operates) during the December quarter are estimated to have stayed at Rs 288 per 50 kg bag, up 3.3 per cent sequentially as well as year-on-year.

Analysts at Motilal Oswal Securities observe there have been instances of a sharp plunge in non-trade prices in select markets like Rajasthan. Thus, Ebitda per tonne is likely to have declined 29 per cent year-on-year, adds Sanjeev Singh at Centrum Broking, in line with his estimates.

Merchant power sales, on the other hand, disappointed, but profits improved, providing cushion to overall profits. The revenues at Rs 291 crore came significantly lower than last year’s Rs 449 crore and even marginally lower than the weak September quarter’s Rs 303 crore. Merchant power sales of 408.6 million units were comparable to the September quarter’s 417 million units, but were much lower than the December 2012 quarter’s 786 million units. The realisations per unit at Rs 3.38, too, were lower than Rs 3.83 in the previous quarter and Rs 3.92 in the year-ago quarter. However, as a results of strong fall in costs, profitability improved. The segment’s profits at Rs 112.6 crore were up 6.5 per cent sequentially and 14.1 per cent year-on-year.

Analysts expect other income to recover to the previous levels, thereby supporting profit growth. They also expect power sales to pick up. However, the overall cement demand scenario is not encouraging.

Shree Cement is a North India-based player and the extended spell of cold is keeping the cement demand from the retail segment down. There are no signs of recovery from the infrastructure and construction sectors, which contribute to almost 45 per cent of India’s cement demand. Though analysts are looking at pre-election spending pushing up demand, there are no signs of the same as yet.

Hence, many analysts have ‘Neutral’ to ‘Hold’ rating on the stock after the results. While Amit Srivastava at Nirmal Bang Institutional Equities says his target price for the stock will remain close to his earlier target price of Rs 4,600, Sanjeev Singh of Centrum has a ‘Hold’ rating with target price of Rs 4,015.

V Srinivasan at Angel Broking maintains a ‘Neutral’ rating. Only a few like Deutsche Bank and Ambit Capital have maintained their ‘Buy’ ratings ,with target prices of Rs 5,850 and Rs 5,033, respectively.