Stock Review: Shree Cement

 

THE Shree Cement stock has outperformed the broader market over the past three months. It has risen 20.4% during the period compared to the 10% gain in the Sensex. The stock's better performance is despite the company's lacklustre results for the September 2010 quarter.

   Investors are optimistic about a strong pick-up in cement demand helped by housing constructions and infrastructure projects in the second half of the financial year. Also, cement prices have moved up in different parts of the country over the past few weeks on expectations of demand revival. This, in turn, should help Shree Cement deal with a rising cost structure and protect its operating margins, going forward.

   However, during the second quarter, the company's operating margin shrank by nearly three-fifths to 19.8% compared with a year earlier. Its net sales also fell 21.2% year-onyear to 716.7 crore during the quarter under review.

   The company's cement realisations fell nearly 15.6% to 3,314 per tonne in the quarter under review. Its cement despatches were just over two million tonnes in the second quarter, a fall of 5% from a year earlier. The company is a leading player in northern markets. All-India player ACC's realisations also declined by 13.8% yo-y on a per-tonne basis.

   Apart from sluggish realisations, Shree Cement also grappled with higher power and fuel costs, which went up nearly 37.8% to 860 per tonne in the quarter. This was largely due to higher prices of coal. The weak performance in its businesses resulted in its net profit that declined a whopping 96.4% to 10.5 crore in the second quarter.

   Going forward, Shree Cement is expanding its power capacity by 300 mw to 550 mw. The additional capacity should go on stream by July 2011. This would involve a capital expenditure of approximately 1,200 crore and would be funded by debt and internal resources. Shree Cement has reduced its exposure to debt funding over the past two years. Its debt-equity ratio was at 1.2 at the end of March 2010 from over two in the previous year. The current expansion would enable it to meet the growing captive and third-party power requirements.

   At CMP, the stock's trailing four quarter P/E is 35.6, which makes it one of the most expensive stocks in the sector.