Cost pressures impact profitability for Shree Cement in Q4

Shree Cements, whose March quarter results came out on Saturday, was not immune to the cost inflation which has been impacting peers in the industry. Shree Cements saw a modest growth of revenue of 3.92 per cent for the March 2022 quarter on a year-on-year basis to ₹4,098.75 crore. As per an IDBI Capital report, the sales volume for March 2022 quarter was at 8 million tons,  2 per cent lower than March 2021 quarter, implying that the topline growth has come from price increases. The average all India price for cement (per 50 kg bag) was ₹379 for March 2022 quarter, a 5 percent growth year on year .

However, EBITDA for March 2022 quarter came down to₹1,048.68 crore from ₹1,303.51 crore a year ago. The EBITDA margin declined to 24.75 per cent from 31.97 per cent in March 2021 quarter, thanks to cost pressures.

In the March 2022 quarter, Brent crossed $100 per barrel and is sustaining above those levels. As per a recent report put out by Nomura, diesel prices averaged ₹87 per litre (in Delhi), which was an 11 per cent rise year on year. The company saw a rise of 5.87 per cent in material cost in March 2022 quarter over the corresponding quarter last year.

Another major driver of cost for the company was power and fuel cost which grew 68.67 per cent year-on-year.The average price of imported coal was around $296 per ton for the period of January-March 2022. According to the report by Nomura, Domestic pet coke prices saw over a 50 per cent hike in February-April 2022, going above ₹20,000 per ton and is sustaining above this level as of now.

Profits for the quarter declined 16.17 per cent to ₹645.2 crore.

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Outlook

Shree cement has corrected nearly 32 per cent from its peak of ₹ 32,048 in April 2021 and is currently trading at ₹ 21,868.25, thanks to the headwinds from the Russia-Ukraine conflict. Shree cement is presently trading at an EV/EBITDA of 20.84 times trailing earnings whereas Ultratech is trading at 15.49x, ACC, at 11.55x, Ambuja cement at 11.03x and Dalmia Bharat at 9.78x.

Shree cement has always enjoyed higher valuation despite it being the costliest cement stock in terms of absolute price. This is because of its higher margin profile than the rest of the players. Ultratech registered a lower 21 per cent EBITDA margin for March 2022 quarter, ACC 14.6 per cent and Ambuja 18.36 per cent. In terms of EBITDA per ton too, Shree cement has an edge. Shree cement achieved a ₹1,310.85 EBITDA per ton, Ultratech registered ₹1,128, ACC  ₹1,028 and Ambuja ₹1,056. Thus, it can be said that Shree cement is the most profitable company in this space and hence, the higher valuation.

According to a report by IDBI Capital, in the March quarter, the company commissioned 3 mtpa grinding unit at Pune, which it increased to 46 mtpa. The company also started commercial operations of its 4 mtpa clinker unit at Raipur in the quarter. In order to achieve its aim to achieve  80 mtpa cement capacity, Shree cement till date has announced expansion plan to set up 6.5 mtpa cement plant (3.5 mtpa Navalgargh Rajasthan, 3 mtpa Purulia West Bengal) with total outlay of ₹4,700 crore. In FY22, including maintenance capex, the company has incurred capex of ₹2,200 crore.

The demand may pick up in FY 23 with increase in government spending. With good monsoons, rural housing has tail winds too. Cement prices have been not very stable in the past year (FY 2021-2022). Prices were on a rising streak in Q1 FY22 but it was halted in Q2 FY22 mainly due to monsoon as it is seasonally a weak quarter.  In the third and fourth quarters, the prolonged monsoon, non-availability of sand and the elections in a few States hampered demand and the prices were flattish only rising to the level of ₹384 per bag in March 2022. The rise in input cost is a industry-wide issue now and therefore all the players will have to pass on the costs to the consumers as it was evident in April this year where price was around ₹407 per bag.  Price may rise further with input cost pressures continuing.

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