Shree Cement: Sluggish demand, rising input costs hurt margins

Shree Cement’s result for the December 2010 quarter again highlights the difficult conditions for the sector due to sluggish demand and rising costs of key inputs like power and freight on a per-tonne basis.

Its operating profit margin declined by 1,850 basis points year-onyear to 20.3% in the third quarter. The net sales of the company, a leading player in the northern region, also fell 9.9% to Rs 780.4 crore. Its net profit also declined by almost four-fifth compared with a year earlier to Rs 27.5 crore in the quarter.

The results were declared on Monday and the stock hit a 52-week low of Rs 1,610 in intra-day trading, before ending at Rs 1,659. On Wednesday , it ended at Rs 1,610.

The cement industry had a difficult operating environment in the first and second quarters of this financial year due to weak realisations on a pertonne basis and rising input costs. Concerns still remain about cement demand due to a lack of fresh infrastructure projects announced by government-funded agencies.

In addition, with home loan rates on an upward trend, analysts are concerned about a slowdown in the real estate sector over the next few quarters. This could also hit cement demand. Adding to the industry’s woes are the rising prices of key inputs. This could hurt cement companies’ operating margins in the short term.

Shree Cement’s realisations declined by an estimated 12.7% yearon-year to Rs 3,177 per tonne in the third quarter, while its cement production rose 3.8% to 2.34 million tonnes during the period.

Cement companies had hiked prices in different parts of the country after the monsoon, but analysts had doubted the sustainability of that move, given the sluggish demand conditions.

In the smaller power division, the company grappled with lower realisations for electricity sold to third parties in the quarter.

Shree Cement trades at a P/E of more than 30 times on a trailing fourquarter basis and is one of the most expensive stocks in the sector.