Shree powers its way out of gloom even as cement div proves a laggard

Higher revenue from its power division helped Shree Cement to more than compensate a flat growth in cement volumes in the quarter to December 2012, leading to better-than-expected results.


Despite a healthy run-up in the stock over the last few months, a healthy balance sheet and a favorable demand scenario makes the stock still attractive.

The demand for cement remained subdued and volumes grew marginally by 5% due to the severe winter and low availability of sand and bricks in the northern region. A ban on sand mining in Punjab and Haryana and closure of brick kilns due to environmental issues slowed down overall construction activity. In addition, margins were under pressure on account of price correction and higher freight costs.

The company was unable to pass on the hike of nearly 10% in diesel prices to customers. However, lower pet coke prices partially offset the impact of an increase in other costs.

The company’s focus on enhancing its power capacity seems to be paying off. Due to enhancement of its power capacity last year, it was able to sell three times more volume than in the same period last year. Shree Cement needs only 30% of its power capacity for its captive needs. Thanks to that, the power segment contributed 18% to total EBITDA compared to 3.4% last fiscal.

Over the last one year, the stock has nearly doubled and currently trades at an enterprise value (EV) per tonne of $185. This is higher than larger peers Ultratech and ACC, which are trading at an EV per tonne of $176 and $150, respectively. However, due to its concentration in the northern and eastern regions and higher operating margins, its valuations could be justified. Capacity utilisation in these regions have been relatively higher than other regions. Going forward, a pick-up in demand will lead to a recovery in price.