Good show by Shree Cement amid cost pressures should ease Street's concerns

In a seasonally soft period impacted by monsoon and amid cost pressures, Shree Cement reported better-than-expected profitability for the September quarter (Q2). This should ease the Street's concerns as cement realisations are likely to improve after the festive season as demand momentum remains healthy. The stock, which fell to its 21-month lows last month, has since risen 14 per cent and should see more gains with improving profitability.   

Revenues at Rs 25.87 billion were up 20 per cent year-on-year and came ahead of Bloomberg consensus estimates of Rs 25.28 billion. Cement volume growth remained strong, growing 15.6 per cent year-on-year to 5.64 million tonnes (mt), while realisation, too, improved 2.1 per cent year-on-year (and 3.9 per cent sequentially) to Rs 4,268 per tonne, according to analysts' calculations. 

Better volumes and realisations for the North India-based cement maker helped boost the topline. However, cost pressures were also visible. With diesel prices up 24 per cent year-on-year (4.8 per cent sequentially) and pet-coke surging 35 per cent year-on-year (3.6 per cent sequentially) in Q2, fuel costs jumped by almost half over the year-ago period. Transportation cost, however, was curtailed and was up 10 per cent. The rise would have been more but for the easing of axle load norms and the company becoming eligible for railway freight rebate under the Railways' Long-Term Tariff Contract scheme. The rebate on eligible freight for the October 2017–September 2018 period was Rs 280.9 million.  

However, adjusted operating profit at Rs 5.33 billion was ahead of expectations of Rs 4.97 billion. The profit per tonne of cement came at Rs 946, says Sanjeev Kumar Singh of Emkay Global, better than his estimates of Rs 785. 

Power business volumes, too, jumped 36 per cent year-on-year led by strong demand, while per unit realisation at Rs 4.5 was better than Rs 3.5 in Q2FY18.

The company, however, provided Rs 1.78 billion for its exposure to the IL&FS group and hence reported net profit of Rs 493.3 million. Nevertheless, adjusted for this provision, profit would have been ahead of the estimates of Rs 1.88 billion.  

Continuing with its expansion, Shree Cement has proposed capacity additions of 5.5 mt. Analysts at ICICI Securities, post results, said that they expect cost pressures to decline (freight cost to decline sequentially due to increase in load-carrying capacity, stabilisation of fuel prices), and believe that input price increase has peaked out in the power business.  

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