 "Shree Cement")
Shree Cement’s June 2020 quarter (Q1) results, announced on Monday after market hours, raise concerns on the margin front because of the subdued outlook on realisations and weak cost control. Valuations, too, are expensive, and factor in the superior return ratio and a healthy balance sheet.
Shree Cement’s stock shed about 4.5 per cent in the last two trading sessions, even as the benchmark BSE Sensex was up 0.5 per cent during the same period. At around 24x its FY21 estimated EV/Ebitda (enterprise value to earnings before interest, tax, depreciation, and amortisation), the stock is trading at a 70 per cent premium to some other large cement players.
In the June quarter, Shree Cement’s volume performance (down 19 per cent) was better than the industry’s (30-35 per cent fall), but it failed to surprise the Street on the operating profit front, unlike its peers.
The company’s Ebitda per tonne of Rs 1,421 was down 4.6 per cent year-on-year (YoY) and 9 per cent sequentially. This was led by relatively high operating cost, besides a 6 per cent YoY drop in realisations. Shree Cement’s per tonne operating cost was up 6.4 per cent sequentially, though it was down by a similar quantum YoY.
On both these parameters, it lagged peers. For instance, while major players, such as UltraTech Cement, Ambuja Cements, and ACC, reported at least 4.8 per cent sequential improvement in per tonne realisation, their per tonne cost was down up to 2.7 per cent sequentially. Also, these three companies’ Ebitda per tonne grew in double digits sequentially.
Thus, according to Binod Modi, analyst at Reliance Securities, “Though it is difficult to draw any conclusion from one quarter on Shree Cement’s cost efficiency, it has raised some scepticism on the cost front."
Besides, given Shree Cement’s rising focus on other competitive markets, there is a question mark on the improvement in realisation.
“While Shree Cement’s home market of northern India remains better placed because of consolidated market structure and lower capacity additions, its increasing exposure to the eastern region is expected to result in blended margin decline,” analysts at Motilal Oswal said in their Q1 report.
They also expect lower Ebitda growth for Shree Cement over FY20-FY22 vis-à-vis large-cap peers. Around 30 per cent capacity augmentation by cement players, including Shree Cement, is expected in the eastern region in the next one and a half years which may result in a battle for market share,
say analysts.
Notably, better volumes and lower realisation in Q1 also hint at Shree Cement’s focus on growth/market share at the cost of pricing, mainly in other regions.
While Shree Cement’s Q1 revenue declined 23.4 per cent YoY to Rs 2,325.8 crore, it was a tad higher than the Street’s expectations of Rs 2,309 crore, according to a Bloomberg poll.
However, its pre-tax profit of Rs 483.1 crore, which was flat YoY, was ahead of analysts’ expectations of Rs 308.7 crore. This was driven by a 32.6 per cent YoY fall in depreciation.
Overall, the Street will be keenly watching the company’s margin trajectory, going ahead.
