Brokerages cut target price on Shree Cement after Q2 result
Shree Cement Ltd’s September quarter (Q2) result was a mixed bag.Cement sales volume grew 16% on a year-on-year basis aided by capacity expansions. Realization growth was muted, and operating margins contracted due to higher raw material and fuel prices.
Profit was dented by an exceptional loss of ₹180 crore from investments in preference shares of Infrastructure Leasing and Financial Services Ltd (IL&FS). The company also incurred forex losses.
Shree Cement also announced the setting up two greenfield projects in eastern India, which are expected to be operational by 2019-20. These projects include a 3 million tonnes per annum (mtpa) grinding unit in Cuttack and a 2.5 mtpa unit in Jharkhand.
Although the Shree Cement stock continues to trade at a premium to other large-cap cement producers such as ACC Ltd, Ambuja Cements Ltd and UltraTech Cement Ltd, the company’s performance is expected to remain challenging.
The trend of cement prices in its key markets including northern, central and eastern India remains volatile. In an environment of input cost inflation, the inability to take price hikes indicates further pressure on the margins of most cement producers, including Shree Cement.
The company’s decision to increase capacity comes at a time when there is already a situation of oversupply, and utilization levels are low, as demand growth is still not adequate.
Some analysts are also wary that capital outlay of around ₹900 crore required for these projects could strain the company’s balance sheet in the near term.
Consequently, a slew of domestic brokerage firms including Edelweiss Securities Ltd, Reliance Securities Ltd and IDBI Capital Ltd have trimmed their target price on the Shree Cement stock. Some, such as Elara Securities (India) Ltd, have also cut the FY20 earnings estimates.
As for the valuations, on a one-year forward price-to-earnings basis, the Shree Cement stock trades at a multiple of 35 times, which is expensive in the current scenario and needs to correct.