Shree Cement: Q2 operationally sound despite rising costs

Per-tonne profitability better than peers

Shree Cement’s performance for the seasonally soft September quarter, which bears the impact of monsoon, was better than expectations at the operating level, even as costs were elevated. Although net profit missed estimates, it was due to higher tax expenses. The profit miss led to the stock correcting 2 per cent to Rs 18,629 levels on Wednesday, but any correction offers an opportunity for long-term investors to buy this most-profitable cement player.

The company’s sales volumes at 4.88 million tonnes (mt) grew seven per cent year-on-year (y-o-y) but were down 0.7 per cent sequentially —largely on expected lines given the monsoon season. However, an increase of 2.6 per cent in the per-tonne cement realisations year-on-year to Rs 4,170 was a key positive. Rising freight costs (up 31 per cent y-o-y) and power and fuel expenses (up 15 per cent y-o-y) impacted Ebitda (earnings before interest, tax depreciation and amortisation), which came at Rs 552.60 crore, down 13.6 per cent y-o-y. But analysts say the control over overall costs was better than expectations. This coupled with improving realisations helped the company post an Ebitda, which was much better than estimates, of Rs 488 crore, as indicated by Bloomberg consensus estimates.

Shree Cement remains an efficient cement producer and, despite cost escalations, has been able to report per-tonne Ebitda of Rs 1,133 in the September quarter. This was much better than the same for peers such as UltraTech (Rs 1,028), ACC (Rs 592), and Ambuja Cements (Rs 705), as reported in the September quarter. 

Higher realisations helped net sales increase 6.5 per cent y-o-y to Rs 2,137 crore in Q2, marginally short of Bloomberg consensus estimates of Rs 2,154 crore.

Higher taxes of Rs 185 crore, as against Rs 26.5 crore in the year-ago quarter, and Rs 106.5 crore in the June 2017 quarter saw net profit decline 13.3 per cent y-o-y to Rs 211.5 crore and miss analysts’ estimates of Rs  277 crore.

Shree Cement’s power division’s performance was muted due to subdued demand and tariffs for merchant power. A 45 per cent y-o-y decline in volume at 295 million units and a 4 per cent y-o-y decline in tariff at Rs 3.5 saw the segment’s Ebitda declining sharply from Rs 62.2 crore in the year-ago quarter to Rs 7.8 crore, but better than the Ebitda loss of Rs 1.36 crore in the June quarter. 

The prospects of Shree Cement remain firm, looking at expected cement demand revival in the second half led by infrastructure and housing spending. Binod Modi at Reliance Securities says that with the recent improvement in demand outlook in Eastern and Northern regions along with visible price uptick, Shree Cement should continue to get traction. He maintains his positive stance on the stock.