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Shares of Shree Cement fell over 4% on the BSE yesterday, a day after the company reported its June quarter earnings.

The cement major posted a net profit of 6.6 bn in the June quarter, a rise of 78.5% from 3.7 bn in the year-ago quarter.

However, the net profit was 13.8% lower than 7.7 bn in the quarter ended March 2021.

Its quarterly profit fell as power and fuel costs rose. Still, the earnings beat estimates.

Company's performance on operational front

Shree Cement's revenue increased 47.9% to 34.5 bn from 23.3 bn, year on year (YoY), but declined on a sequential basis from 39.6 bn.

EBITDA stood at 11.5 bn in June 2021 up 39.7% from 8.3 bn in the same quarter a year ago.

Market experts believe that even though the company's results were mostly in line with estimates, the street had expected a beat after its peers like UltraTech Cement, Ambuja Cement, and ACC delivered a 10% to 15% beat on earnings before interest, tax, depreciation, and amortisation (EBITDA).

June quarter earnings of Shree Cement were a mixed bag. While realisations were better-than-expected, increased operating cost was a dampener, offsetting benefits of improved realisations.

Also, its volume growth on YoY basis was weighed by lower clinker sales. Cement volumes grew 41% YoY to 6.8 m tonnes (MT), while clinker sales, down 62% YoY, pulled down overall volume growth to 39% YoY to 6.8 MT.

Shree Cement lagged behind peers in terms of volume growth in the June quarter, with UltraTech Cement, Ambuja Cement, and ACC delivering 47%, 53%, and 44%, respectively.

Global brokerage firm cuts target

Global brokerage CLSA maintained an 'underperform' rating on the stock and cut the target price on expensive valuation.

Shree Cement’s quarter one EBITDA of 10.1 bn, down 18% quarter on quarter (QoQ) was in line with CLSA's estimates.

Volume declined 17% QoQ and was slightly better than pan-India peers.

Shree Cement aims to achieve 80 MT capacity by 2030 (7% CAGR) from 43 MT in March 2021, indicating that its goal of doubling the capacity in five-seven years is progressing at a slower pace than its earlier guidance.

With the net cash of 64 bn and cumulative EBITDA of 155 bn over the next three years, the use of cash will be a key focus, CLSA said.

Meanwhile, brokerage firm Nomura believes the company's margins are likely to compress in the next two quarters owing to weaker prices and higher input costs.

Equitymaster's technical view on the cement sector

We reached out to Brijesh Bhatia, Research Analyst at Equitymaster, and editor of the premium monthly recommendation service Fast Profits Report, for his technical view on the cement sector.

Here's what he has to say...

The financial market was hit in March 2020 by lockdown and by March 2021, they are up by 100% from the lows.

Cement sector outperformed and most of the cement stocks are up by 100% from the lows.

The demand in cement is largely lead by government spending on infrastructure and real estate.

The commercial office been vacant with work-from-home culture and new housing projects been stalled, can still the cement sector rally from current levels?

We created an Equal Weighted Cement Index (EWCI) chart using cements stocks with market cap over 10,000 crores and compared it with Nifty Realty Index.

Equal weighted cement index chart
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Equal weighted cement index chart

Since the lows in March 2020, EWCI and realty index rallied in a same manner.

But since March 2021, we are witnessing divergence between the two sectors (marked red) where cement stocks are trading near high and realty stocks are underperforming against cement stocks.

To check the future outperformance of cement stocks, we compared EWCI with Nifty.

EWCI/NIFTY
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EWCI/NIFTY

The ratio chart of EWCI Index vs Nifty above is indicating profit bookings can be on cards for cement stocks and it has reversed from the similar highs made in June 2020.

The negative crossover of averages on Moving Average Convergence Divergence (MACD) supports an underperformance of EWCI over Nifty.

How the stock markets reacted to Shree Cement’s results

Shares of Shree Cement opened the day at 28,427.6 on the BSE yesterday and 28,195 on the NSE.

Yesterday, its share price closed at 27,303.8 (down 3.5%) on the BSE and 27,299 (down 3.5%) on the NSE.

At its current price, it is trading at a P/E of 43.

The share touched its 52-week high of 32,050 and 52-week low of 18,214.4 on 9 April 2021 and 24 September 2020, respectively.

Over the last 30 days, the Shree Cement share price is down 1.7%. Over the last one year, the company’s share price is up 25.7%.

Shree Cement performance
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Shree Cement performance

About Shree Cement

Shree Cement is one of India's premier cement makers. It was incorporated in the year 1979.

The company's manufacturing operations are spread over north and east India across six states.

It has a consolidated cement production capacity of 44.4 million tonnes per annum (MTPA) and a power generation capacity of 742 MW.

The company is an energy conscious and environment friendly business organisation.

They have three brands under their portfolio, namely Shree Ultra Jung Rodhak Cement, Bangur Cement, and Rockstrong Cement.

Their manufacturing units are located at Beawar, Ras, Khushkhera Suratgarh and Jobner (Jaipur) in Rajasthan, Laksar (Roorkee) in Uttarakhand, Aurangabad in Bihar, Panipat in Haryana, Baloda Bazar in Chhattisgarh, and Bulandshahr in Uttar Pradesh.

The company is headquartered in Kolkata India.

For more details about the company, you can have a look at Shree Cement's factsheet.

This article is syndicated from Equitymaster.com

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