Investors with a one-to-two-year perspective can consider buying the stock of Shree Cement. With a planned expansion into the promising eastern market, cost savings from captive power and high profit margins, the company is a good investment option in the cement space. At Rs 4,371, the stock is trading at 15 times its expected earnings in FY15 and is at a discount to Ambuja Cements and UltraTech.
Shree Cement will be commissioning new capacities totalling eight million tonnes (mt) a year by June 2015. This is besides its existing capacity of 13.5 mt a year. The eastern region is facing a shortage of cement supplies, and therefore, this move may help Shree Cement expand its market share significantly. It is now present in North and Central India. Overall cement demand may also revive next year with government infrastructure projects likely to pick up post-elections.
The company is cash-rich and intends to fund the capex through internal accruals. Its cash and current investments stood at Rs 1,071 crore in end-June with low leverage. Its debt-equity ratio was 0.2 times. For the year ending June 2013, the company’s cement output recorded a healthy growth of 8.5 per cent (revenues up 8.8 per cent), higher than the industry’s despatch growth of 6 per cent. Operating profit margin at 31 per cent was among the highest in the industry, thanks to the company’s captive power capacity and lower logistics costs. The cost of captive power is Rs 3 a unit, while the cost of grid power is around Rs 5-5.50 a unit. Also, the company largely uses pet coke - a cheaper fuel than coal - for both its cement and power operations. Its investment in waste heat recovery systems (56 MW of power generation currently, to increase by another 25 MW by next year) is also paying off. On the logistics front, setting up of split grinding units in closer proximity to markets and a sensible mix of rail and road transport have helped.
Shree Cement generates about 18 per cent revenues and 14 per cent profit before tax from its power business. After using around 125 MW for its cement plants, it has a surplus of around 400 MW, which it sells to State utilities as well as in the merchant power market. In FY13, the segment reported revenue growth of 125 per cent, despite lower power prices as sales volumes nearly doubled. The September quarter may be weak for the company due to an extended monsoon in some parts of the country, which has kept cement sales under check. But any weakness in the stock following its earnings announcement can be an opportunity to buy the stock.