Lower volumes take the sheen off cement players

For March 2015 quarter, while volumes declined 3-10 per cent for ACC, Ambuja Cements and UltraTech, players such as Shree Cement saw profits fall 27-41 per cent

All large players in the cement universe saw lower demand impacting sales volumes during the March’15 quarter. Thus, the key theme for cement stocks moving forward will be demand improvement, which is necessary to prop up realisations and consequently profitability.

Ambuja Cements saw cement sales volumes at 5.35 million tonnes (mt) declining 9 per cent from 5.88 MT in the March’15 quarter. Slightly better cement realisations compared to year ago quarter helped revenues decline at a slower pace of 8 per cent year-on-year. Sales at Rs 2,425 crore came lower than Bloomberg consensus estimates of Rs 2,561 crore. However, improved operational efficiencies helped the company post higher than expected Ebitda of Rs 510 crore, much better than Bloomberg estimates of Rs 472 crore, translating into an Ebitda per tonne of Rs 953. At the net level though, as per directives of the Companies’ Act, increasing depreciation along with higher taxes led to profits declining sharply. At Rs 318 crore, net profit thus came lower than consensus estimate of Rs 322 crore. Nevertheless, better operating performance boosted street sentiment which saw Ambuja’s stock close 3.5 per cent up at Rs 238.85 on Wednesday.

  In contrast, Shree Cement, which also reported its March quarter performance on Wednesday, saw its cement volumes at 4.13 mt rise 7.6 per cent year-on-year. However, this increase was on the back of new capacities commissioned at Chhattisgarh, adjusting for which volumes would have declined, said analysts. The Ebitda per tonne at Rs 796 is lower than peers, but it was on account of higher clinker sales. Ebidta in the cement business has been healthy, said analysts.

The company’s other key segment, power that contributed about 17 per cent to gross revenues, however, reported a soft performance with unit sales at 334 million a whopping 38 per cent lower compared to March’14 quarter. Thus, Shree Cement’s sales at Rs 1,573 crore came lower than Bloomberg’s consensus estimate of Rs 1,647 crore. Ebitda at Rs 341 crore, however, was only a tad lower than estimates of Rs 342 crore. Shree Cement also saw depreciation increase sharply (up almost two-fold) to Rs 240 crore, partly due to start of new facilities. Net profit at Rs 119.7 crore came almost at part with Rs 120.3 crore estimated by analysts. The stock thereby also gained a per cent to close at Rs 10,331.

Apart from the commissioning 2.6 mt capacity in Chhattisgarh, Shree Cement has also enhanced cement production capacity at Bangur, Rajasthan. It has also announced completion of acquisition of 1.50 MTPA cement grinding unit of Jaiprakash Associates located at Panipat in Haryana. Thus, the company is gearing up to benefit from the expected increase demand in the second half of FY16.

Ambuja Cement, too, is expanding capacity. Though it enhanced capacity in West Bengal by 0.8 MTPA that are likely to accrue benefits, analyst believe that another 4.5 mt capacity in North will only accrue benefits once Holcim-Lafarge merger gets completed. Hence, trading at about $170 Enterprise Value (EV)/tonne, analysts as Shrenik Gujrathi at Angel Broking believe the company will trade at a discount to its larger peers, and see limited upside in the near-term. Consensus target price for the stock (at Rs 239) as per 21 analysts polled on Bloomberg in April’15 stands at Rs 255.

For Shree Cement, analysts are looking at demand improvement, which can help the company realise benefits of increased capacities and cost efficiencies. Currently, the consensus target price as per analyst polled on Bloomberg in April stands at Rs 10,691, which is a tad higher than current level of Rs 10,331.

UltraTech with expanded capacities (about 63.3 MTPA) and having reported best Ebitda per tonne of Rs 1,121 and lowest decline in sales volumes (three per cent to 11.5 mt) remains the top pick of analysts. Its target price of Rs 3,125 also indicates good upside from current levels of Rs 2,681. For ACC, too, many analysts remain positive though some still are looking at Holcim-Lafarge merger to complete before material benefits accrue. The company had reported healthy Ebitda per tonne of Rs 1,043 for quarter ending March’15. However, it saw more than 10 per cent decline in volumes to 5.82 mt during the March’15 quarter. The consensus price for stock (at Rs 1,484) is close to Rs 1,600 levels.