Lower realisations, higher operating costs to hit Shree Cement's growth

Shree Cement’s performance in the June 2010 quarter was adversely impacted by a near 11.6% year-on-year fall in realisations on a per-tonne basis in its key cement division, coupled with a rise in its operating costs.

Senior company officials have said that with the construction activity related to the Commonwealth Games gradually coming to an end along with the onset of monsoon, there was pressure on cement realisations in the quarter.

In addition, in its smaller power division, realisations per unit were lower compared to the year-ago period. As a result, the company’s operating profit margin declined 1,560 basis points y-o-y to 30.6% in the June quarter, while its total operational income rose just 2.4% y-o-y to Rs 944.6 crore.

Also, the company’s depreciation costs rose 54.8% in the first quarter, leading to a fall of 63.6% in its net profit compared to Rs 105.9 crore in the previous year. The results were declared on Saturday, and on Monday, the stock declined 4.2% to Rs 1,805.4

Other large players operating in the northern region, such as JK Lakshmi Cement also saw their operating profit margins nearly halving on a y-o-y basis to 17.4% in the quarter.

Going forward, Shree Cement’s realisations are not likely to pick up on a per tonne basis in the short term. This is because its additional capacities are coming on stream in the northern region at a time when there is little clarity on implementation of large construction projects in the region over the medium term. The company’s ability to manage its operating costs will be a key parameter to watch for.

Shree Cement is now working on expanding its power capacity from nearly 210 mw (end of March 2010) by an additional 300 mw over the next 12 months, at a cost of approximately Rs 1,200 crore. This would be financed through a combination of internal accruals and debt. The company’s leverage ratio was 1.2 at the end of March 2010, substantially lower than the previous year, and funding this expansion should not be a problem. Also, the growth in its topline from this expansion would be felt in the second half of FY11.

Shree Cement’s realisations declined nearly 11.6% on a y-o-y basis to Rs 3,405 per tonne in the June 2010 quarter, while its dispatches grew 3.9%. At Rs 1,805.4, the stock trades at nearly 12.8 times on a trailing four-quarter basis and it is rather expensive. Shree Cement trades at a P/E, which is higher than that of an all India player like ACC.