Shree Cement: Rising freight cost to remain a drag on margins
Shree Cement Ltd’s freight expenses touched a multi-quarter high in June. On a year-on-year basis, it surged 43% to Rs629 crore (see chart 1).
Analysts attribute this increase largely to the ban on overloading of trucks in Uttar Pradesh and Rajasthan. That, along with supply of additional clinker from Rajasthan to meet the requirements of the Bihar grinding unit, pushed transporting expenses higher.
Shree Cement caters mainly to the markets of north and central India. It is expanding its footprint in the east and aims to become a pan-India company by the end of 2019.
Since Shree Cement also relies on the railway route to transport cement, a busy season surcharge from the railways applicable during the quarter coupled with elevated diesel prices, weighed on its overall freight cost.
Higher freight cost coupled with elevated power and fuel expenses impacted the operating margin, which narrowed over 500 basis points from a year earlier. Now that the price of petroleum coke (petcoke)—a key input material—has stabilized, the company’s power and fuel cost may remain flat going ahead, say analysts. The fuel mix of Shree Cement consists only of petcoke.
However, higher freight cost will continue to persist since overloading restrictions are here to stay, thus weighing on its operating profit per tonne, cautioned analysts. The company’s freight cost/tonne surged 26% year-on-year.
As chart 2 shows, other cement makers having exposure to these markets have also witnessed their freight costs rise, although the spike has been sharpest for Shree Cement.
Apart from higher freight cost, the subdued performance of the company’s power division is a concern. Though cement volume growth of nearly 14% year-on-year was better than expected, it was driven by capacity expansions in the east. Sustainability of realizations is a key concern.
Meanwhile, the Shree Cement stock is trading at a one-year forward price-to-earnings multiple of 27 times. A slew of brokerage firms have a “Sell” rating on the stock, citing rich valuations and the aforementioned factors.