Shree cement announced its Q1 FY23 results last week.

The company managed to register a year-on-year (YoY) growth of 21.45 per cent in topline to ₹4,414.85 crore. The increase in revenue can be attributed to an increase in cement prices during the quarter. The prices at the all India level were at ₹404 and ₹393 per bag in April and May 2022, respectively against ₹370 and ₹ 374 in April and May 2021, respectively.

The sales volume was up 10 per cent YoY at 7.5 million tons, resulting in a price growth of 10.45 per cent.

On the profitability front, like its peers, the company presented a subdued picture. The EBITDA of the company contracted around 21.6 per cent in Q1 of FY23 over the same period last year.

Among its peers, Ultratech posted highest volume growth of 16 per cent, while ACC posted 10.5 per cent growth. In terms of revenue, Ultratech led with 28 per cent growth, while ACC reported a 15 per cent growth.

Shree Cement reported a profit after tax (PAT) of ₹299.59 crore in the reporting period, a 38 per cent decline over the same period last year. On the other hand, Ultratech’s PAT was ₹1537.11 crore in the June 2022 ended quarter, a 10.4 per cent decline from June 2021, while ACC’s PAT was ₹222.17 crore (58.38 per cent decline).

Cost pressures

The major worry for the cement industry is rising fuel costs, and the pressure on input costs due to rising volatility in the global market is affecting margins. 

Shree cement’s EBITDA margin has declined around 10 percentage points YoY in the reporting quarter to 18.15 per cent, while ACC reported a decline of 13.1 percentage points YoY to 9.7 per cent and Ultratech reported a decline of 8.6 percentage points YoY to 21.35 per cent.

Shree cement reported a steep rise in power and fuel costs in the reporting period. It’s power and fuel cost as a percentage of sales was at 34.28 per cent in June 2022 quarter compared to 19.6 per cent in June 2021 quarter. In comparison, Ultratech and ACC reported figures stood at 65.32 per cent and 58 per cent, respectively.

The logistics cost of Shree cement rose 9.1 per cent to ₹914.54 crore at the end of the June 2022 quarter against ₹838.17 crore in June 2021. The EBITDA per ton of Shree cement was at ₹1068.6, while Ultratech and ACC reported ₹1279.55 and ₹1149 EBITDA per ton, respectively. This might suggest that Ultratech and ACC handled their operations more efficiently than Shree cement in the reporting period.

The price of Brent currently is around $100.69 per barrel, the peak was $120.89 per barrel in June quarter. The price of coal is around $407 per ton, while the peak in June quarter was $427 per ton.

According to a report by Emkay research, domestic petcoke prices fell 10 per cent MoM to ₹20,144 per ton in July 2022, while the peak in June 2022 quarter was around ₹22,380. The prices seem to have cooled down a bit, but volatility can still be expected due to uncertain geopolitical situation.

Valuation

Shree cement has corrected nearly 33 per cent from its peak in September 2021. The Q1 results seem to not have been satisfying for the D-street which was evident by the 7.3 per cent decline in stock price on July 28, 2022. However, in the subsequent trading session, the stock has made a recovery.

Shree cement is trading at a forward P/E of 32.9x, which is at a discount to its historical average of 36.8x, whereas Ultratech is trading at a forward P/E 28.3x and ACC at 23.7x.

Outlook

On the positive side, the demand in the coming months look relatively good. The growth is expected to be led by the infra segment which accounts for nearly 25 per cent of the total demand. Increased government capex is also a tailwind. Besides, retail housing projects, including rural housing, are expected to pick up.

While Shree cement is trading at a discount to its historical average, fuel cost pressures will play a dominant role in determining the profitability of the company in the near-term.

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