There are worries about a near-term capacity overhang in north and east India, from where the firm gets 80% of its volumes
From its recent high of ₹22,399 seen in July, the Shree Cements stock has fallen nearly 12%
Cement maker Shree Cement Ltd’s operating margin improved to a multi-quarter high of 29.7% in the June quarter. Like its peers, this was aided by a softening of input costs and better realizations. But the Street was far from excited. In fact, the stock has fallen 3% since the earnings announcement last week.
First, sales volume declined by 13% year-on-year to 6.1 million tonnes (mt). While sales of most cement producers fell in the June quarter, the fall in the case of Shree Cement was steeper than expected.
And given the weakness in the economy, the outlook on volume wasn’t bright. “We estimate weak sales in 1HFY20 to drag the company’s FY20 volume growth to 4%—its slowest growth in the last nine years," analysts at HDFC Securities Ltd said in a report.
Second, there are worries about a near-term capacity overhang in Shree Cement’s key operating regions of north and east India, where it gets more than 80% of its volumes. The company is adding 5.5 mt of grinding capacity in the eastern region, 2.5 mt of which has already been commissioned. The east is estimated to witness maximum capacity addition of more than 25 mt over the next two years, among any region. Channel checks by various brokerage firms showed that prices in the north and east have corrected by ₹15-20 and ₹20-25 per bag (each bag weighs 50kg), respectively, in July.
What’s more, as Kotak Institutional Equities pointed out that at a one-year forward EV/Ebitda of 20 times, valuations look stretched. EV stands for enterprise value, and Ebitda is earnings before interest, tax, depreciation and amortization. Some brokers have trimmed their target price on the stock, considering the above mentioned concerns.
From its recent high of ₹22,399 seen in July, the Shree Cements stock has fallen nearly 12%. On the positive side, the higher benefits of falling power and fuel costs, along with softening of petroleum coke prices, are expected to flow in the forthcoming quarters. That said, one is unlikely to see a material improvement in the stock’s performance unless this is accompanied by robust volume and realization growth.