Shree Cement stock valuation prices in profit beat in trying times

Shree Cement Ltd’s efforts to trim costs combined with a favourable market mix led to a strong profit beat in the March quarter (Q4FY20).

The company clocked a 772 basis points (bps) jump in earnings before interest, tax, depreciation and amortisation (ebitda) from the year-ago period, to 33.5%. One basis point is one hundredth of a percentage point. This was higher than Bloomberg’s 14-broker consensus of 31.6%.

In addition to lower raw material, power and fuel costs, a phenomenon seen across the industry during the quarter, Shree Cement scored on reducing employee costs. It cut variable salaries of key personnel for FY20.

Meanwhile, relatively strong cement prices in the northern region, where Shree Cement has a presence, helped realisations. Even the 5.4% year-on-year (yoy) drop in net cement sales was not as bad as the 10-11% drop in sales of peers Ambuja Cements Ltd and ACC Ltd during the quarter.

So, the 2% yoy drop in standalone revenue (including a small portion from the power segment) can be attributed to the lockdown and standstill in sales in the last week of March. Shree Cement’s ebitda/tonne too jumped by about 34% yoy, sustaining the trend of being among the most profitable listed cement firms.

Be that as it may, April and May marked the beginning of a weak FY21. “The company will decide on its large capital expenditure plan (doubling of capacities in six years) after demand conditions improve as management expects 20%+ volume decline in FY21,” says a report by Emkay Global Financial Services Ltd.

Inspite of this, Shree Cement’s stock has recovered 23% from its 52-week low on 3 April. News of easing lockdown, especially for the construction sector and resumption of activity in semi-urban and rural infrastructure projects, has improved investor sentiment.

But, looks like the valuations of 27 times the enterprise value/ebitda of the company prices the company’s profitability beat in tough times. Therefore, it leaves no room for negative surprises ahead, say analysts on the Street.