Shree Cement investors don’t have much to look forward to

Reacting to the earnings, the stock declined 2.5% on Thursday. On Friday as well, the stock fell around 1.5% on the NSE in the early trade.

Although the entire cement industry is battling cost inflation, despite better realisations, Shree Cement’s operating performance was lower than consensus estimate.

In simple terms, had it not been for improvement in realisations, compression in margin would have been acute. What adds to disappointment is that once Shree Cement was the leader in handling operating costs, but peers seem to be catching up on that parameter, so the company is losing its edge, note analysts.

Cement sales volume rose 9.6% y-o-y to 7.5 million tonnes and was largerly in-line with expectations, but that didn’t lead to much cheer.

The company has commissioned a grinding unit at Pune and Cuttack and a 4 million tonne per annum clinker (mtpa) unit at Raipur. After completion of the ongoing projects, its domestic capacity will reach to 56mtpa by 2024 from 46.4mtpa currently. Note that the company aims to achieve 80mtpa capacity by FY30.

Amid rising competition, capacity expansions bode well for the company’s long-term volume growth outlook, but for now, investors are perturbed by higher operating costs. Consequently, leading to more earnings downgrades for the company.

“We have trimmed our estimates for FY23/FY24 to factor in continued hardening in the costs and soft market environment due to monsoon. Further, we expect the increase in the competitive intensity will impact ability to pass on the escalating costs,” said analysts at JM Financial Institutional Equities.

The September quarter is seasonally weak for the sector as demand is subdued due to rains. Prices of some critical inputs such as petroleum coke and coal have started to ease, but its benefits will reflect only in the second half of the year.

Against this backdrop, the stock’s valuation, which has seen a moderation following the steep correction in its share price, is still not attractive.

“Shree Cement expansion projects are on track; however, despite capacity headroom, it is unable to outperform market growth. We find Shree Cement’s sector-leading valuations unjustified,” said analysts at Kotak Institutional Equities.

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