Demand revival to lift Shree Digvijay's nos

Shree Digvijay Cement, a mid-sized player focused on the western region, is one of the first few players in the sector to report its March ‘10 quarterly performance.

Its operating profit margins declined 260 basis points Y-o-Y to 21.4%. The company’s net sales also declined 5.8% Y-o-Y to Rs 90.6 crore in the March ’10 quarter.

The stock plummeted nearly 6% to Rs 18.2 on Monday. In addition, over the past three months, this stock has declined nearly 3%, compared to a more or less flat Sensex during this period.

Meanwhile, pressure on the company’s operating profit margins in the quarter under review was due to its key power
& fuel costs that rose nearly 14.9% Y-o-Y to Rs 1,172 per tonne, given that its cement dispatches in the March ’10 quarter were estimated to have grown 5% Y-o-Y to 2,98,000 tonne.

Domestic and international coal prices have risen sharply over the past 3-4 months, with analysts pointing out to a 25% rise in the average cost of imported coal at the end of the fourth quarter of FY10 compared to a few months earlier, given a pick-up in global industrial activity.

In addition, the company grappled with its realisations that declined nearly 10.3% Y-o-Y to Rs 3,040 per tonne. Also, analysts highlight increased quantities of cement from the southern market that were being sold in the western region, given the difficult operating environment in the South at the start of the fourth quarter of FY10, and the resulting pressure on realisations in the western region.

This lacklustre operational performance also resulted in the company’s net profit that also declined nearly 14.2% Y-o-Y to Rs 16.3 crore in the March 2010 quarter. Going forward, demand for cement is expected to reach a peak in the June quarter, given strong construction demand before the start of the monsoon season. However, a rising trend in operational costs is a cause for concern for Shree Digvijay and the broader cement sector. The stock trades at about 8 times on a trailing four-quarter basis and we are neutral on this stock.