Market share loss dents Shree Cement's June quarter performance

Weak demand, low pricing ability to restricting performance in following quarters

The share price of Shree Cement has shed over 2 per cent in the last three trading sessions. The decline has come despite higher per-tonne operating profit for its cement business in the June quarter (Q1).

The stock has underperformed the broader market indices like the Nifty, which was flat during the same period. What hurt investors besides pricey valuations was the market share loss, along with a sharp 13 per cent year-on-year (YoY) decline in cement volumes against the estimated 1 per cent decline at the industry level. Price hikes taken by the company at the beginning of Q1 worsened the overall demand pressure for the company.

Nevertheless, the price hikes resulted in a sharp 14.5 per cent YoY improvement in net sales realisation from its cement business, therefore boosting Q1 financials.

It significantly restricted the downward top line pressure from lacklustre volume offtake. On a standalone basis, Shree Cement’s net sales skid just 1 per cent YoY to Rs 3,036 crore.

Finally, healthy net sales realisation led to an increase in operating profit. Shree Cement’s Ebitda per tonne of Rs 1,489 from its cement business was 1.8 higher YoY. In fact, the per-tonne Ebitda was better than other leading cement players such as ACC (Rs 934) and UltraTech Cement (Rs 1,428).

Shree Cement’s Ebitda margin of 29.7 per cent in Q1, which was up 1,098 basis points (bps) YoY, was also the highest since the September 2016 quarter. Additional margin support came from lower petcoke and diesel prices. Power and fuel cost as well as freight charges as a percentage of net sales were down 173 bps and 574 bps, respectively, compared to the year-ago quarter. Net profit moved up sharply by 30 per cent YoY to Rs 363 crore.

Likely demand weakness with progress in monsoon, and low pricing ability across the industry, will restrict the overall performance of Shree Cement in the ensuing quarters.

However, according to Binod Modi of Reliance Securities, the company’s capacity augmentations over the medium term will help it gain market share — with strong profitability and without much stress on its balance sheet. Thus, the firm is expected to maintain its premium valuations.

The stock is trading at 17 times its FY21 enterprise value to Ebitda, as compared to 10-15 times in case of other major players such as ACC, UltraTech Cement, and Ambuja Cement, among others.