Excluding defensive stocks, analysts rarely tend to agree on anything these days. So, it’s surprising to see many brokerage firms raving about a single company from a sector that is expected to “underperform”. The company, which has captured the imagination of most analysts, is Shree Cement, one of the largest producers of cement in north India, with a capacity of 12 million tonnes a year.
The company is one of the few to have seen an earnings upgrade, after it surprised the Street with a good set of numbers in the quarter ended June. Since the company is changing its financial year from one ending March to one ending June, the company’s FY12 has seen five quarters. For the quarter ended June (Q5FY12), the company saw overall revenue grow 43 per cent year-on-year to Rs 1,455 crore. Analysts estimate cement volumes to have increased 34 per cent to 3.24 million tonnes in the quarter, higher than the industry’s growth rate.
Not only did the company surprise on sales and volume growth, it also sprang a surprise in terms of realisations. In the key markets Shree Cement operates in, realisations improved six per cent sequentially and 12 per cent annually. According to Motilal Oswal Securities, cement earnings before interest, taxes, depreciation and amortisation per tonne stood at Rs 1,324 (against the estimated Rs 1,093), higher by Rs 184 per tonne quarter-on-quarter and Rs 444 per tonne annually.
Another highlight of the company’s performance was capacity utilisation. Excess capacity has plagued the sector over the last one year, with several players operating at 70-80 per cent utilisation. However, Shree Cement reported capacity utilisation of 92 per cent in the quarter, compared with 71 per cent in the corresponding quarter last year.
It is, therefore, hardly surprising the company’s net profit grew 456 per cent to Rs 350 crore compared to the year-ago period. While higher realisations and strong demand contributed to the growth in profit in the quarter, cost efficiency, along with lower depreciation and taxes, also helped the company post the spectacular rise in net profit. It also benefited from moderation in raw material costs, especially in those of pet coke and power.
Clearly, the stock has run up in recent times. However, most analysts have upgraded earnings estimates for the company in FY13 and FY14, going by efficiencies and growth potential. Deutsche Bank says the stock is trading at a 22 per cent discount to its replacement cost, and remains the preferred mid-cap cement pick. However, an adverse ruling in a competition case and the company’s inability to increase prices are key risk factors.