Shree Cement Q1: valuations expensive, positives priced-in
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Cement companies with a strong presence in north and central India were poised to see a robust June quarter earnings because of surging cement prices and improved demand.
Just like JK Lakshmi Cement Ltd, an anticipation of stellar performance pushed the Shree Cement Ltd stock to a new all-time high of Rs.17,240.05 on 3 August.
Bloomberg’s consensus estimate expected the company’s stand-alone net profit and sales at Rs.269.2 crore and Rs.2,125.3 crore, respectively. The company exceeded expectations on both the counts. Net profit surged fivefold from a year ago to Rs.508.14 crore. Sales, excluding excise duty, stood at Rs.2,198.65 crore for the quarter, up 28%.
Profit after tax was aided by a significantly lower depreciation cost and higher other income. Also, improvement in volume and operating margin of the company’s cement segment buoyed overall performance. Cement sales volume jumped 19% year-on-year (y-o-y) to 5.17 million tonnes (mt) in Q1FY17. Revenue from the cement business jumped 51%. “Cement realization grew 11% y-o-y. Strong realization growth was partly driven by nearly Rs.65 crore of subsidy benefits recorded under revenues and other income as per IND-AS regulations, which were previously routed through the balance sheet,” brokerage house Religare said in a note.
Ebitda (earnings before interest, taxes, depreciation and amortization) margin surged from 23.03% to 33.58% on a y-o-y basis due to a sharp decline in power and fuel costs, which fell more than 20% y-o-y since pet coke prices eased. Freight cost, on the other hand, rose nearly 10% y-o-y limiting further improvement in operating margins.
The company is ramping up capacities. It augmented the capacity of its Aurangabad, Bihar, plant from 2.0 mt per annum (mtpa) to 3.6 mtpa, taking total cement capacity to 27.6 mtpa. Also, it is setting up an integrated plant with clinker capacity of 2.4 mtpa and cement grinding unit of up to 4 mtpa in Karnataka and boosting clinker capacity of its plant at Baloda Bazar, Raipur, by 2.8 mtpa.
Talking about valuations, the stock is more expensive than peers and is priced at 48 times one-year forward earnings. Year to date, Shree Cement shares have risen nearly 48%.
Capacity expansions would aid the company to deliver better operating performance over the next two-to-three years, but as of now, most positives are already in the price, say some analysts. Given the sharp run-up the stock has seen, upside from current levels is limited.