Shree Cement extends fall; stock down 13% in 6 days post weak Q1 results

Management indicated that cement demand would remain weak until calendar year 2024-end and expects a full recovery from Q4FY25, brokerage firm MOFSL said.

Shares of Shree Cement declined 3.5 per cent to Rs 24,234.15 on the BSE in Thursday’s intra-day trade, extending its past 5-fay fall after the compay reported weak earnings for the June quarter. The cement manufacturer reported a 45 per cent drop in its  Q1FY25 standalone profit after tax (PAT) at Rs 318 crore as against a PAT of Rs 581 crore in a year ago quarter.

In the past six trading days, the market price of Shree Cement has declined 13 per cent. The stock had hit a 52-week low of Rs 23,431.90 on August 18, 2023. It has corrected 21 per cent from its 52-week high of Rs 30,710 hit on February 1, 2024.

In Q1FY25, the company’s net revenue was dipped 3 per cent from Rs 4,971 crore to Rs 4,835 crore. Total sale volume increased by 8 per cent from 8.92 million tonnes to 9.64 million tonnes. Earnings before interest, taxes, depreciation, and amortization (EBITDA) reduced by 2 per cent from Rs 933 crore to Rs 916 crore, primarily due to a lower-than-estimated realization.

Management indicated that cement demand would remain weak until calendar year 2024-end and expects a full recovery from Q4FY25. Shree Cement expects volume growth to be in line with the industry in FY25. Further, pricing is a function of demand, and if demand remains weak, prices will weaken. The company is currently working on the 15.4 mtpa grinding capacity addition at various locations, to be commissioned in phases until FY26-end.

The Rs 11 trillion capital expenditure announcement in the Union Budget 2024 signifies the government's commitment to modernizing India’s infrastructure through various projects and allocations. This together with 3 crore additional houses in PM Awas Yojana and launch of phase IV of PMGSY will undoubtedly drive demand for cement and other building materials, the company said.

Motilal Oswal Financial Services (MOFSL) said Shree Cement posted an underwhelming performance in Q1 with a higher decline in realization (down 6 per cent QoQ vs. ~2-3 per cent decline for peers; 6 per cent below our estimate). However, the cost was in line with our estimates. Management indicated that cement demand will remain weak until CY24-end, which will also adversely impact prices, the brokerage firm said.

Analysts at MOFSL continue to believe most of the company’s expansions focus on existing markets (North, East, and part of South), while a large part of Central India and West will remain untapped until FY27E.

According to Crisil, the capacity addition in the cement industry tends to be sporadic because of long gestation period for setting up facility and the numerous players adding capacity during the peak of a cycle. This led to unfavourable price cycles for the sector in the past. 

Moreover, profitability remains susceptible to volatility in the prices of inputs, including raw material, power, fuel and freight. Increase in pet coke prices during fiscal 2022 and 2023 impacted the profitability of several cement players. Realisations and profitability are also affected by demand, supply, offtake and other regional factors, the rating agency said in its rationale.