Shree Cement’s December 2012 quarter performance was boosted by the power segment, as cement demand and realisations remained subdued. However, moving forward, the softness in the latter segment is likely to rebound after the cold spell gets over and demand revives. The power segment, too, is likely to continue its good performance in the second half (March and June 2013; year ends in June). Thus, most analysts see the stock price rebounding to Rs 5,000 levels from Rs 4,514 at present, thereby continuing the upward trajectory from June 2012.
Cement’s muted show
The demand slump with the onset of the festive season, elections in Gujarat and Himachal, and cold weather conditions in North India have had a bearing on cement realisations during the December quarter. The company operates in predominantly in North India, with some exposure to the western and central regions. Although per bag cement prices in the north, central and west at Rs 281, Rs 277 and Rs 283, respectively, were higher than in the quarter a year earlier, these were three to five per cent lower as compared to the September quarter. Thus, average realisation at Rs 3,733 a tonne fell 4.4 per cent sequentially.
With demand soft, the company’s cement and clinker volumes at 2.99 million tonnes (mt) also fell 1.7 per cent sequentially and 0.7 per cent over the December 2011 quarter. While lower coal costs did offset some negatives due to a surge in transportation costs, earnings before interest, taxes, depreciation and amortisation (Ebitda) per tonne (Rs 1,019) fell 3.1 per cent year-on-year and 14 per cent sequentially.
The power segment surprised positively. Contributing almost 22 per cent to revenue, it saw unit sales grow to 786 million compared to 307 million in the September 2012 and 256 million in the December 2011 quarters; per unit realisation at Rs 3.97, though, was lower than the respective figures of Rs 4.45 and Rs 4.30. Nevertheless, lower costs helped the business report a profit before interest and tax of Rs 99 crore against a loss of Rs 112 crore in year-ago profit.
Helped by the power segment, Shree Cement’s total revenue could still grow 19.4 per cent year-on-year and eight per cent sequentially. While overall operating margins declined, higher other income and lower depreciation costs helped. Hence, net profit was 267 per cent higher on a year-on-year basis.
Moving forward, cement demand in the north is likely to improve, while some price increases have already been taken. Analysts at Citi, in a January 22 report, observes that cement prices across India are showing signs of an uptick after a correction in November/December (due to severe winter, production indiscipline and weak demand). Conversations with industry sources indicate prices have been/are being raised this month, on improving demand and rail wagon shortages (diversion to priority sectors). Prices in Delhi (north) are up Rs 40 (16 per cent) to Rs 285 a bag as the cold winter subsides.
Rajesh Kumar Ravi at Karvy Stock Broking expects sales to improve during the second half of 2012-13, the peak construction period, led by a 9.5 per cent year-on-year volume growth and 8.3 per cent rise in net realisation. He is factoring in higher power sales of 1.4 billion units during the second half, led by strong demand in the northern states. Sanjeev Kumar Singh at Centrum Broking expects the power segment to continue its good performance.
The company also expects to commission units IX and X (two mt each) at Ras, Rajasthan, by June 2013 and June 2014, respectively, taking its clinker capacity to 13.5 mt. Corresponding grinding units are likely to come up at Rajasthan and Bihar by June 2014. Thus, the cement capacity is likely to touch 18.5 mt by FY15. On the back of limited capacities being added in the north, analysts see good long-term visibility and prospects for the company.