The September quarter earnings of cement makers were expected to be weak, given the seasonal impact. In that context, Shree Cement’s weak Q2 FY13 results are not entirely surprising. Nevertheless, a higher than expected decline in the company’s operating performance affected the sentiment towards the stock. As a result, the company’s shares fell 4% on the NSE in early trading on Monday.
Aided by capacity ramp-up and higher non-trade sales, cement and clinker volumes grew 18% to 7.46 million tonnes in Q2FY23. This three-year compound annual growth rate is over 9%, say Jefferies India analysts. Furthermore, it is faster than expected industry growth of high single digits for 2Q, the research house said in a report.
But good sales growth was hit by the twin blows of weak realizations and higher operating expenses. Consequently, its Ebitda on a per tonne basis, at Rs 701, was the lowest in the last 28 quarters, noted analysts at Motilal Oswal Financial Services. Ebitda is short for earnings before interest, taxes, depreciation and amortization.
Cement dealer’s channel checks showed that there was no significant improvement in cement prices in key North and East markets of the company in the September quarter. Cement dealers raised prices in October as well, however, it remains to be seen whether they persist.
As far as cost inflation is concerned, international petroleum coke and imported coal costs have declined from recent peaks. But with a gap of a few quarters, the operating margin of the sector is expected to improve. Amidst all this, the competitive intensity is expected to be high with the entry of Adani Group. Therefore, to protect their market share, many large-cap cement manufacturers are in capacity expansion mode.
Remember, Shree Cement aims to reach 55.9mtpa capacity by FY25 and continues to add capacity in various sectors. MTPA is million tonnes per annum. In FY22, it had a capacity of 46mtpa.
The good news for Shree Cement investors is that the company should be able to post decent volume growth going forward. Analysts at Nirmal Bang Institutional Equities say that the current utilization level for the company is around 62-64%, which offers plenty of growth opportunities.
The domestic brokerage house said, “With the recent capacity addition in East and West markets and upcoming capacity in North and South regions, we expect SRCM to continue to grow at higher volumes than the industry along with geographic diversification. Will keep.”
However, on the flipside, it’s slashing costs versus competitors, is a dampener to the stock’s outlook.
“Its cost advantage versus its peers is declining as other companies increase their green power usage, reliance on split grinding units, etc. The stock is 17.7x FY24E EV/EBITDA (v/s its 10-year average) a year ahead) trades at an EV/EBITDA of 18x), which restricts any material upside,” Motilal Oswal’s report added. EV stands for Enterprise Value.
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