Shree Cement on a soft patch

Last Updated: Tue, May 29, 2012 19:40 hrs

Cement stocks have given fabulous returns in recent quarters as production discipline resulted in improving realisations. The low base also helped volume growth. Thus, players such as Shree Cement Ltd saw their stock prices double. Shree’s stock more than doubled in less than seven months— from the 52-week low of Rs 1,570.50 on September 12, 2011 to Rs 3,279.95 on April 2, 2012.

However, since then, it has lost 24 per cent, including nearly six per cent after its results were announced in mid-May, to Rs 2,509.15 currently, as cement prices in north and central India have come under pressure and demand is not keeping pace. The monsoon season being round the corner also dampens the sentiment.

Hence, both demand for cement and its prices are likely to remain under increased pressure in the coming months. For Shree, which derives about a fifth of its revenues from the power business, the merchant power agreements are also to end in the June quarter. Uncertainty over the new agreements and their pricing (under pressure lately) is adding to its the woes.

FY13: non-operational boost
In Rs crore  Q4' FY12 FY12 FY13E
Net sales 1,477.8 4,618.0 5,287.5
% change 38.1 31.5 14.5
Ebitda 373.0 1,195.1 1,233.9
% change 26.1 35.0 3.3
Ebitda (%) 25.2 25.9 23.3
Depreciation 234.6 801.1 513.4
% change -11.5 18.5 -35.9
Net profit 80.1 241.7 523.2
% change -19.9 15.3 116.1
EPS (Rs) - 62.0 150.2
PE (x) - 41.8 17.3
E: Estimates; Change is year-on-year                              Source- BRICS Securities
Note: The company has changed its year end to June, thus the current year will be of 15 months ending June 2012. However, the above figures for FY12 and FY13 are for 12 months ended March 2012 and 2013, respectively

Cement prices slip
Shree has most of its operations in north and central India, wherein average prices in the March quarter stood at Rs 273 and Rs 249 a bag, respectively, slightly lower than the previous quarter’s Rs 274 and Rs 252 a bag (50-kg). Thus, Shree’s realisation for the March quarter got affected, coming at Rs 3,423 a tonne, 10 per cent lower sequentially. The margins, too, were affected on the back of the railway freight and excise duty rises undertaken in March. The Ebitda (earnings before interest, taxes, depreciation and amortisation) margin at 25.18 per cent was lower by 120 basis points over the December quarter.

The scenario is not very rosy so far in the June quarter, too. Ajit Motwani and Chandan Asrani of Emkay Global, in their recent report on the sector, suggested average prices in north India had declined by Rs 5-20 per bag in May, compared with April, led by subdued demand on account of disruption in the supply of construction materials (like sand) and shortage of labour. Sand mining was banned in Punjab and Haryana from April 1, affecting supplies of basic raw materials and pushing up their prices. With the start of the harvesting season, labour shortage has affected construction activities not only in the north but also in central India. This too, has seen prices decline by Rs 5-10 a bag. All these are likely to reflect on the profitability of cement players.

The Emkay analysts say, “April-May prices, declining trend is rather unusual—indicating that prices-led surprises are behind us and the surprises could actually be negative. Recent cost increases like railway freight hike and excise duty hike to reflect in June 2012 quarter numbers”.

Capacity gains
Positively, Shree had added 3.3 million tonnes per annum (mtpa) of capacity by commissioning new grinding plants and some de-bottlenecking in phases in the second half of 2011-12. The company also commissioned new merchant power capacity of 300 Mw in two phases, in October 2011 and January 2012. These should boost volumes.

However, for now, V Srinivasan at Angel Broking says 87 per cent of the cement capacities of Shree are located in Rajasthan, which state-wise is the country’s second biggest capacity cluster and, hence capacity utilisation will be low due an excess supply scenario. This could also keep realisations under check, until demand picks up ahead of supply. Comparatively, only 13 per cent of its capacity, which is in Uttarakhand, is likely to see better utilisation.

Power business outlook
Expanded captive power capacities not only make Shree a cost-effective cement manufacturer but also leave around 430 Mw available for merchant sales. The power segment revenues that contributed 20 per cent to overall revenue were up 141 per cent up in the March quarter. However, average realisations were down 10 per cent on lower merchant power rates. Novonil Guha, an analyst at BRICS Securities, observes, “While Shree Cement has firm contracts for sale of power for 255 Mw till June 2012 at an average realisation of Rs 4.2 a unit, for the period after June, the short-term PPAs (power purchase agreements) are still to be finalised.” He feels in this monsoon season Shree may find it difficult to get customers for merchant power, as demand is expected to decline.

Thus, with subdued outlook for both cement and power sales, the stock may remain under pressure in the near term. The regulatory uncertainty with regard to the investigation by the Competition Commission of India on cartelisation charges by cement majors remains another major overhang, adding to uncertainty.

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