Shree Cement: In-line Q1, robust outlook

Industry leading margins should help the company amid govt's infra push and expected pickup in construction activity

The results of cement major Shree Cement, released after market closing, seemed to be more or less in line with expectations. But the market response to the stock had been muted with some profit-booking after a sharp run-up in the past few sessions.

In Q1, 2021-22, Shree Cement reported Rs 3,635 crore in consolidated operational revenues, which was 46 per cent more than Rs 2,487 crore in the corresponding quarter of 2020-21 and 14 per cent less than the Rs 4,235 crore of Q4, 2020-21. The PBDIT amounted to Rs 1,164 crore, up by 43 per cent versus Rs 814.5 crore (YoY) and down by 14.8 per cent versus Rs 1,366.3 crore (QoQ). The PAT was Rs 630 crore before adjustment, up by 90.7 per cent versus Rs 330 crore (YoY) and down by 21 per cent versus Rs 798 crore (QoQ).  

The OPM was stable at around 32 per cent. The Power & Fuel costs, which are critical for a cement company, stood at 19.5 per cent of net sales compared with 17 per cent QoQ and 18.7 per cent YoY. Freight charges also rose, to 23 per cent of sales, versus 22.9 per cent QoQ. This was balanced off by higher realisations per tonne. Neither trend of rising costs is surprising. Fuel prices are up (including diesel and PET Coke) and although the company has its own captive power, the cost per unit has escalated. Transport charges are also up, because diesel costs are up.

The quarter was impacted by the second wave, but the construction industry was less badly affected than in Q1, 2020-21 when it suffered from 10 weeks of lockdown. Most analysts will treat this as a one-off disruption. June was a relatively dry quarter due to the late monsoon, which may have helped in terms of activity.

Traditionally, the Q2 (July-Sep) tends to see soft demand due to the monsoons. However, the low base effect will also persist due to the fact that Q2, 2020-21 was also affected by the pandemic. Even in the second half of 2020-21, activity was below normal in the construction and real estate industry.

Most market watchers are optimistic about the future of the cement industry given that there are many construction projects on the anvil. The government’s infrastructure push as announced in the 2021-22 Budget should kick-in with a delayed impact in the second half of fiscal 2021-22.

Shree Cement has strong margins and lower costs than many of its peers, apart from being the third-largest cement-maker in terms of capacity. It has a narrow equity base and an excellent debt:equity ratio, and good debt coverage. It was net cash positive in the last fiscal. It has underperformed the Nifty in the past year. It could catch up if economic activity accelerates.