Shree Cement: cost pressures here to stay
After surging in the June quarter, Shree Cement Ltd’s power and fuel cost per tonne has softened. While this key expense fell sequentially in the three months ended September, it remains higher compared to the year-ago quarter (see chart).
According to some analysts, the decline seen in fuel cost could be a short-term relief. That is because petcoke is a key input material for cement producers. Petcoke prices began to harden after August when Hurricane Harvey hit the US. Operations of oil and gas refineries were disrupted by the hurricane that led to production shutdowns, causing a shortage of the fuel. Many Indian cement makers rely on imported petcoke.
The fear is that if the ongoing rally in global crude oil prices continues, it would translate into further hardening of petcoke prices. Compared to large peers, Shree Cement has a higher reliance on petcoke for meeting its fuel requirements; hence it could be impacted more.
It’s true that recently the company has won auctions for coal mines in Chhattisgarh, but the switch from petcoke to coal may be gradual and margins may continue to be impacted in the near term, cautioned analysts.
Shree Cement’s operating margins narrowed to 26.2% in the September quarter from 32.7% a year ago. The dismal performance of its power division continues to remain a drag on margins.
Cement sales volume increased around 7% year-on-year to 4.88 million tonnes and cement price realization improved marginally. Sequentially, realizations declined given the seasonal weakness.
Meanwhile, the company’s stand-alone net profit fell by 27% year-on-year, marred by higher tax expenditure.
In short, apart from softening fuel expenses, overall earnings were disappointing.
Reacting to this, the Shree Cement stock fell 2.72% intraday and closed down about 1%.
Going ahead, the focus will not only be on the cost front, but also on the company’s capex plans. 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.
Year to date, the stock has rallied more than 27% and analysts see limited upside from here.