Stock Review: Shree Cement

SHREE Cement's June-quarter performance took a major hit due to rise in operating costs and an 11.6% year-on-year fall in realisations on per tonne basis at its key cement division. Senior company officials said, cement realisations may come under pressure this quarter due to the onset of monsoon and end of construction activity ahead of Commonwealth Games. In addition, realisations per unit at a smaller power division were lower compared to the year-ago period. As a result, the company's operating profit margin declined 1,560 basis points y-o-y to 30.6% in the quarter under review, while its total operational income grew just 2.4% y-o-y to Rs 944.6 crore. Also, the company's depreciation costs rose 54.8% in the first quarter, leading 63.6% fall in net profit during the quarter against Rs 105.9 crore in the year-ago period. The results were declared on Saturday. The stock fell 4.2% to Rs 1,805.4 on Monday. Other large players operating in the northern region such as JK Lakshmi Cement also saw their operating profit margins nearly halving on y-o-y basis to 17.4% in the quarter under review.

   Shree Cement's realisations are not likely to pick up on a per tonne basis in the short term. This is because its additional capacities are coming on stream in the northern region at a time when there is little clarity on implementation of large construction projects in the region over the medium term. The company's ability to manage its operating costs will be a key parameter to watch for.

   Shree Cement is now working on expanding its power capacity from nearly 210 mw (end of March 10) by an additional 300 mw over the next 12 months at approximately Rs 1,200 crore. This would be financed through a combination of internal accruals and debt. The company's leverage ratio was 1.2 at the end of March 2010, substantially lower than the previous year, and funding this expansion should not be a problem. Also, the growth in its topline from this expansion, will be felt in the second half of FY11.

   Shree Cement's realisations declined nearly 11.6% on a y-oy basis to Rs 3,405 per tonne in the June 2010 quarter, while its despatches grew 3.9%. At Rs 1,805.4, the stock trades at nearly 12.8 times on a trailing four-quarter basis and it is rather expensive. Shree Cement trades at a P/E, which is higher than that of an-all India player like ACC.