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Shree Cement: dismal earnings; rich valuations not justified

LiveMint logoLiveMint 17-05-2017 Harsha Jethmalani

Shree Cement Ltd’s March-quarter earnings were a disappointment on many fronts. True, volumes at the regional cement maker grew 11% year-on-year to 5.93 million tonnes, the highest in many quarters. But that was driven by capacity expansion in eastern India.

Operating margin contracted sharply by 875 basis points to 21.47% from 30.22% in the same quarter a year ago. This was largely on the back of freight and forwarding costs that surged 42% year-on-year. A basis point is 0.01%. Cost of raw materials, and power and fuel costs increased more than 20% year-on-year each, adding to the pain on the margins front.

Lower availability of fly ash in Rajasthan could be one factor why input costs surged. Also, petroleum coke (pet coke) prices continue to head northwards. A key concern is that while other large cement makers use a mix of linkage coal, domestic coal and pet coke, Shree Cement has completely switched to pet coke.

Though cement price realization improved both annually and sequentially, the company’s net profit more than halved to Rs304.51 crore in the March quarter. Apart from higher costs, what also dragged down the profit was a steep fall of 68% in the “other income” component.

Meanwhile, the Shree Cement stock touched a new 52-week high of Rs20,560 on Monday. The stock, however, closed 1.45% lower on Tuesday, despite benchmark indices Nifty and Sensex scaling new highs. The company released its earnings after market hours.

Despite a poor earnings show, the stock trades at a one-year forward price-to-earnings multiple of 51 times. This is much higher than larger peers and pan-India cement makers ACC Ltd (42 times) and Ambuja Cements Ltd (46 times). Surely, it doesn’t warrant such rich valuations and needs to correct. A slew of brokerage firms have a sell rating on the stock, citing expensive valuations.

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