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Shares of Shree Cement Ltd have underperformed those of UltraTech Cement Ltd by a huge margin in the past year. The former’s March quarter earnings have also lagged the latter.

“Shree Cement’s Q4FY21 Ebitda failed to measure up on the surprise quotient displayed by the majority of industry peers. Reported Ebitda stood more than 5% ahead of our estimate, whereas the beat was by 20-30% for other large peers," analysts at Edelweiss Securities Ltd said in a report on 21 May.

Shree Cement also lacked the surprise punch, not just for the March quarter, Edelweiss analysts pointed out. Its FY21 operating performance was also slightly underwhelming. The company’s Ebitda/tonne stood flat year-on-year (y-o-y), whereas most cement makers reported growth, the analysts said.

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Satish Kumar/Mint


The underperformance of the shares seems understandable against that backdrop. Besides, there has been a huge reduction in leverage in FY21 in the case of UltraTech, causing a re-rating in the stock as well.

Shree Cement’s operating margin was impacted by a jump in costs. On a standalone basis, margins fell 358 basis points (bps) y-o-y to 30% in Q4FY21. One basis point is one-hundredth of a percentage point. On a sequential basis, operating margin declined almost 300bps. Costs of raw materials consumed saw a moderate increase and freight costs jumped 34% y-o-y on higher diesel prices.

Raw material costs for the sector were impacted by a rise in fly-ash and slag prices and higher inbound logistics costs. However, peers have a better grip on costs. Despite the cost pressure, UltraTech, ACC Ltd and Ambuja Cements Ltd saw their margins expand in Q4FY21. As such, Shree Cement’s operating performance comes as a disappointment for its investors, analysts said.

Most cement makers have tried to offset the impact of a rise in petroleum coke prices by fuel mix optimization and other cost control measures. However, Shree Cement’s employee cost and other expenses rose by 44% and 35% y-o-y respectively in the March quarter. Other expenses were higher because of an increase in advertising spends and repair and maintenance expenses, the company said. A rise in employee costs can be partly attributed to salary increments and could be a one-off, analysts said.

Shree Cement’s average realization/tonne for the March quarter was 200-250/tonne higher than consensus estimates, analysts said, but that gain was offset by elevated operating costs. Among other positives, total sales volumes grew 19% y-o-y with cement volumes at 8.2 million tonnes in Q4FY21, beating analysts’ estimate of 7.5-7.7 million tonnes. Akin to peers, a favourable base aided volume growth. Its FY21 volume growth of 7.7% at 26.8 million tonnes is among the best in the industry, analysts said.

Lower depreciation and interest cost resulted in standalone net profit growth of 30.5% y-o-y to 767 crore, beating Bloomberg’s consensus estimate of 690 crore. Meanwhile, the stock is trading at a one-year forward EV/Ebitda of 19 times, according to Bloomberg data. EV is short for enterprise value. Shree Cement is still the most expensive listed Indian cement stock, followed by UltraTech, which is trading at a valuation multiple of 16 times. A steep margin contraction could weigh on the stock’s near-term sentiments, but analysts said Shree Cement’s strong cash flow position is likely to keep its valuation multiple higher than competitors.

In FY21, the company’s net cash improved to 6,520 crore from 3,320 crore in the previous financial year.

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