Shree Cement: Decent volume growth; valuations expensive

Shree Cement in the September quarter delivered both on volume and margins front, but its shares are trading at an expensive valuation

Graphic: Naveen Kumar Saini/Mint
Graphic: Naveen Kumar Saini/Mint

Shree Cement’s profit grew 18.3% year-on-year (y-o-y) to Rs291.5 crore for the September quarter, much below Bloomberg estimates of Rs392.50 crore. But this miss was on the back of higher-than-expected depreciation cost due to adoption of new accounting standards. Hence, analysts are not reading too much into it.

Unlike its peers, this north-based cement producer delivered both on the volume and margins front. Volume grew 9% y-o-y to 4.57 million tonnes, courtesy a capacity ramp-up in east India. Realizations improved, buoyed by firm cement prices in northern India. The September quarter’s cement Ebitda of Rs1,300/tonne is the highest since fiscal year 2012, brokerage house Motilal Oswal Securities Ltd said in a report. Ebitda stands for earnings before interest, tax, depreciation and amortization.

As far as the power business is concerned, volume remained flat y-o-y and realization fell marginally. Power Ebitda jumped 14% y-o-y led by lower costs. Overall Ebitda was boosted by significant increase in margins and volume of the cement segment.

Meanwhile, Shree Cement will invest Rs652 crore for capacity expansion. Funded through internal accruals, this move involves setting up of two new plants in Rajasthan and Bihar. All capacities are expected to be commissioned latest by the first quarter of FY19.

Shares of the company have outperformed the Sensex in the past one year and are trading at an expensive valuation— one-year forward price-to-earnings multiple of 32.06. Not only Shree Cement, most cement stocks have rallied sharply on expectations of better volume growth in the second half of the fiscal year, but the demonetization drive could delay the much-awaited demand revival.

Most rural transactions happen in cash and given the shortage of new currency, it is unlikely for the rural segment to drive volume growth in the near term. Urban demand was already sluggish and now the cement sector would be a casualty of disruption in the realty sector. The only silver lining could be the award of new infrastructure projects by the government. Nervousness among market participants is quite evident as cement stocks have lost nearly 8-12% in the last few trading sessions.

After surging petroleum coke prices, demonetization seems to be another party pooper for cement stocks.

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