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Shree Cement: Valuation may limit the gains

Ujjval Jauhari / New Delhi 27 May 16 | 05:32 AM

Shree Cement's results for the quarter ended March were not much different from those of ACC, UltraTech, and Ambuja Cement. All the four companies saw strong improvement in sales volumes, which made up for the decline in realisations.

Sales volumes for Shree Cement were the best. At 5.33 million tonnes, volumes grew 13.5 per cent sequentially and 29 per cent year-on-year. Realisations have been low for cement firms during the March quarter, but should inch up as price hikes were taken around March. For Shree, a regional firm with dominance in north where the cost of cement in a bag was weakest at Rs 250 (all-India average Rs 307), realisations were bound to take a bigger hit. The company's per-tonne realisation at Rs 3,368 was lower than Rs 3,505 in the December quarter and Rs 3,537 a year ago.

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Thus, volume growth pulled up revenues to Rs 2,017 crore, up 28.2 per cent year-on-year, higher than the Bloomberg consensus estimate of Rs 1,997 crore. Ebitda at Rs 505 crore was in line with the estimate of Rs 506 crore and net profit at Rs 223 crore topped estimate of Rs 189 crore due to higher Other Income and tax credit. Ebitda is earnings before interest, tax, depreciation, and amortisation.

The cement segment's profitability was a bit disappointing. While all peers have seen Ebitda per tonne increase sequentially due to lower fuel and power costs, Shree's Rs 769 Ebitda per tonne fell from Rs 801 crore in the December quarter. Since Shree already uses a high proportion of coking coal, its fuel and power costs remained flat sequentially. In comparison, peers increased pet coke (which costs less) use that led to lower power and fuel costs.

Owing to this and the high valuation (up 30 per cent in three months), the stock fell 1.6 per cent to Rs 12,950 on Thursday even as the Sensex gained two per cent.

But, Shree, one of the most cost-efficient producers, remains a good pick on recovery in demand. While it trades at a replacement cost of $195 a tonne based on FY18 analysts' estimates compared to UltraTech's $185 a tonne, experts suggest that investors should use corrections to accumulate the stock.

Growth triggers: Improvement in demand and ongoing capacity expansions. Timely expansions have historically propelled the company's growth. Analysts at Religare say the stock is trading at enterprise value/Ebitda of 18x/13.5x FY17/FY18 estimates and they have a buy rating. Target price is Rs 11,896, going by a Bloomberg poll in the past one month (before results).

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