Focus on higher realisation improves Shree Cement's earnings outlook

Despite a miss in the March 2019 quarter (Q4) performance, cement and power producer Shree Cement's stock hit a 52-week high at Rs 20,332.9 on Monday on the BSE, before closing with over 5 per cent gains at Rs 20,300. While part of the gains were led by the Street's exuberance following the exit polls, the management's aim to improve realisation and operating profitability, amid volatile cement prices, turned investor sentiment positive.

In Q4, even as cement volumes were up 13.4 per cent year-on-year (YoY) at 7.3 million tonnes and power unit sales by 10 per cent, Shree Cement’s 17 per cent rise in net revenue to Rs 3,285 crore were a tad lower than Bloomberg consensus' estimate of Rs 3,314 crore. Higher depreciation and power and fuel expenses led to a 20 per cent YoY fall in net profit to Rs 321 crore (21 per cent lower than expectations of Rs 405 crore).

However, increased focus on high-margin trade segment and high-quality premium products should improve cement realisations, expects the management. This, coupled with improving pricing trajectory in its key regions, should propel operating profits. Though it is still not confident on the pricing environment, expectations of stable demand after the poll results should support prices.

With a revival in cement realisation, analysts at Reliance Securities have raised their Ebitda/tonne estimates for FY20 and FY21 by 11 per cent and 8 per cent, respectively, and expect 23 per cent annual growth in earnings for the next two years. Even in Q4, Shree Cement's share of trade segment shot up to 73 per cent from 67 per cent a year ago, improving net sales realisation by 1.6 per cent YoY to Rs 4,225 a tonne. This, besides an 11 per cent fall in per tonne freight expenses, resulted in a sharp 342 bps YoY expansion in Ebitda margin to 25.8 per cent in Q4 — highest in the past six quarters. 

For investors, while the volume and profit outlook appears healthy, Shree Cement's pricey valuation of 21 times FY20 estimated Enterprise value/Ebitda (1.5 times more than Ultratech Cement's) indicates limited near-term upsides.

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