Considering that the cement industry is battling multiple challenges of rising freight, fuel and power costs, the Bangur-owned Shree Cement Ltd put up a decent show in the March quarter.

Investors, too, had subdued expectations. Hence, the 6% increase in cement sold and 9% increase in average realization when compared to the year-ago period is good news. It mirrors an uptick in demand in the northern and central regions that are strongholds of Shree Cement.

Of course, one must take into account the low base that prevailed in the year-ago period, as the country was still reeling under the effect of the note ban. Further, a part of the increase in sales volume may have come from the Shree Cement’s aggressive increase in production capacity too.

In any case, the 15% year-on-year (y-o-y) jump in net revenue to Rs2,811 crore beat Bloomberg’s average estimate. The cement segment drove up revenue, while the power segment that is less material to performance posted a revenue contraction.

But the problem of rising costs is not yet behind Shree Cement. With a near 100% dependence on petcoke for its fuel, rising petcoke prices are weighing on profit margins.

Fuel and power cost rose by 34%, while freight costs were up by 27% y-o-y, mainly due to higher diesel prices and overloading restrictions in some states. This was sufficient to dampen operating margin, which though was a tad higher than the year-ago level. Operating profit, although in line with the forecast, grew by 11.5%, lower than the revenue growth.

But that’s not to say that Shree Cement’s premium valuations will ebb. The company is still among the lowest-cost producers of cement in the country with the best return ratios too. A report by Motilal Oswal Securities Ltd says that the brokerage expects a 29% compounded annual growth rate in operating profit led by healthy growth in sales volume and a steady uptrend in cement prices from here on.

Brokerages are betting on higher government spend on infrastructure such as roads and recovery in the housing sector, both of which add up to be the largest consumers of cement.

The dampener is the uncertainty around supply and price of petcoke, prices of which scaled new highs in the last few months. Meanwhile, any ban on the use of petcoke (to curb pollution) is sure to hurt Shree Cement. This uncertainty is a looming threat for earnings and consequently valuations.