(Graphic: Vipul Sharma/Mint)
(Graphic: Vipul Sharma/Mint)

Are Shree Cement’s premium valuation multiples justified?

  • The company stated that there could be some volume loss in the pursuit of value, indicating higher price realizations
  • The Shree Cement stock hit a 52-week high of 20,656.95 on the National Stock Exchange on Monday, though it closed lower at 20,346.25

Shree Cement Ltd’s sales volumes grew 13% from a year earlier to 7.3 million tonnes in the March quarter, partially aided by capacity expansions. However, realization growth was unimpressive because the company’s sales were higher from the eastern region, where cement prices remained subdued.

The Shree Cement stock hit a 52-week high of 20,656.95 on the National Stock Exchange on Monday, though it closed lower at 20,346.25. According to analysts, the Street could be relieved that the company’s capacity expansion initiatives are now behind it. Shree Cement incurred 6,000 crore in FY19 for this purpose. The focus is now expected to shift to improving utilization and profitability.

However, for cement producers, improving profitability or even utilization for that matter, would be easier said than done. That is because, though firms have been resorting to price hikes, it’s not clear whether these will be sustained. It is true that operating costs are moderating, but that alone is not enough.

A cement dealer channel check by Kotak Institutional Equities showed that price hikes, which started in the south in February, have become more broad-based since April.

All-India cement prices have increased from 359 per bag, which weighs 50kg, in April to 367 in May. Prices in the March quarter stood at 328 per bag.

However, the survey also showed that demand in the June quarter of FY20, so far, has been stagnant in most regions. This means that, given the weak demand, these prices may not sustain, especially since the second quarter is a seasonally weak one because of the monsoon.

What could make the situation tricky is the company’s shift in strategy from volume to value. In a post-earnings conference call with analysts, the management guided for volume growth of 11-12% for FY20. However, it stated that there could be some volume loss in the pursuit of value, indicating higher price realizations. Further, the company has already launched two value-added products, including Shree Roofon in the south, in the last three months.

The Shree Cement stock trades at a one-year forward EV/Ebitda of around 21 times. EV stands for enterprise value and Ebitda is short for earnings before interest, tax, depreciation and amortization. This makes it the most expensive cement stock among large firms. Given that some “ifs and buts" still linger, these valuations are expensive and need to moderate.


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