Investors can consider selling their holdings in the stock of Shree Cement to lock into recent gains. At Rs 4,196, the stock trades at a multiple of 15 times its likely per share earnings for FY14, closer to larger peers such as ACC and Ambuja Cements.
In the last one year, the stock has zoomed 40 per cent on optimism over contributions from the power arm and higher offtake in cement in the first-half of the year. But from here the upside for the stock could be limited.
Cement demand growth has been muted in the last two months following poor demand from housing and infrastructure sectors. Shree Cement, in particular, has been facing challenges from capacity constraints, apart from slower demand growth. In February, Shree Cement (total cement capacity is 13.5 million tonnes a year) reported despatches of 9.67 lakh tonnes, down over 15 per cent from a year earlier. In the December-2012 quarter, the company’s cement segment reported a growth of 3.6 per cent in revenue with volumes registering a meagre six per cent growth and realisation dropping over two per cent.
Even over the next one year if there is a sluggish demand in cement, the company cannot take advantage of it as it is already running at 90 per cent capacity utilisation. The company’s new capacities are likely to be commissioned only by FY15. A 5-million-tonne a year grinding unit in Ras, Rajasthan and a 3-mt a year clinker capacity in Bihar are in the pipeline. Shree Cement derives a fourth of its revenue from power business. The company’s total power generation capacity is 560 MW now after the commissioning of 300 MW of thermal power (solely for open market trade) last year. In the December 2012 quarter, revenues from the power segment increased 88 per cent though the average tariff per unit fell, year-on-year. However, it is doubtful if the company can keep up with a similar growth rate given that the demand for merchant power may drop if the power distribution companies continue to see State Electricity Boards delaying payment.
In the December 2012 quarter, operating profit margins fell four percentage points sequentially to around 27 per cent (vs. 29 per cent in the same period last year). Benefit of price correction in coal and pet coke in the international market were to a large extent offset by rupee’s depreciation. There is also some uncertainty hanging over the stock from the ongoing investigation by the Competition Commission of India against cartelisation. On an enterprise value basis, the stock trades at around Rs 11,500 a tonne. Though the business includes the power arm, the valuation is significantly higher compared to ACC and Ambuja Cements.