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S. Vaidya Nathan

SHAREHOLDERS of Shree Cement can stay invested and consider paring exposures in the stock at higher levels — in the Rs 55-60 range. The stock now trades at a price-earnings multiple of around four times its likely 2002-03 earnings of around Rs 12 (it could be a rupee or so higher). It has the potential to command a slightly higher valuation based on its consistent fundamentals across various business cycles.

But given the relatively small capacity of around two million tonnes and the ongoing consolidation that could make life difficult for smaller players, the room for upside linked to fundamentals may not exceed 20-25 per cent. From time to time, the stock has seen sharp spikes in prices linked to the possibility of a strategic partner been roped in. But the top management has virtually ruled out this prospect in the course of 2002.

So prices over the next six months or so may be largely driven by fundamentals. Investors can consider fresh exposures with a high-risk preference at the current price levels, which have been some kind of a lower range for the stock in the last 12 months.

Suitability: The stock is appropriate only for investors with a considerably high appetite for risk. There has been some institutional interest in the stock. But this can cut both ways in a stock such as Shree Cement, given the relatively low level of liquidity. This is one key reason why investors should use any sharp upside move to book profits. A buy and hold approach will not pay in this stock.

Steady showing: In what has been a rather difficult year in terms of cement prices, Shree Cement has managed to fairly well compared to most other players. A combination of better operating efficiencies and aggressive marketing has helped Shree Cement turn in reasonably healthy profits when similar companies (with small capacities of one to two million tonnes) have been hard-pressed.

The modest improvement in cement prices in the last quarter has also helped. For the October-December 2002 period, Shree Cement showed a 5 percentage points improvement in profitability compared to the first six months of the 2002-03 and 2 percentage points compared to the same period of 2001-02. Helped by a 20 per cent rise in sales and check on costs, earnings rose to Rs 15.7 crore this quarter against Rs 6.1 crore in the same period of 2001 and Rs 13.4 crore in 2002-03 first half.

In the fourth quarter, a similar performance may well be on the cards as there is not likely to be any significant downside pressure on cement prices. Operating already at more than 100 per cent capacity, Shree Cement would have to depend largely on cement price increases for a sizeable growth in revenues as well as earnings. This may be the significant factor that could drive the stock price trends and also act as a cap on the upside.

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