Shree Cement

Investors with a one-year perspective can consider exposure in the stock of Shree Cement. The company’s timely capacity-additions that could drive strong volume growth, healthy cash flows and high operating margins are key positives. At the current market price of Rs 1269 Shree Cement trades at about 9 times its estimated 2008-09 earnings.

The company is among the leading cement players in North India and has four plants located at Beawar and Ras in Rajasthan. The installed cement capacity of the company stands at about 8.3 million tonnes per annum, after recent capacity additions. The location of its manufacturing units enables Shree Cement to cater to the markets of Delhi, Haryana, Punjab, Uttar Pradesh (West) and Uttaranchal.
Demand growth

Shree Cement enjoys a 13 per cent market share in the Northern region where demand is expected to grow above a 10 per cent annualised rate until FY-10. The markets covered by Shree Cement — Haryana and Rajasthan — are likely to outpace the regional demand growth, driven by construction of hydropower and other infrastructure projects.

Demand growth in Delhi is expected to remain strong on the back of construction activities related to the Commonwealth games. Expected capacity additions in 2009 and 2010 could lead to moderation in cement prices in North India.
Capacity addition

Volume growth could place Shree Cement on strong ground in this respect. Shree Cement has historically timed its capacity additions well before peaks in the cement cycle. This time round, even as the bulk of capacity additions by cement majors are expected after June this year, Shree Cement has already commissioned a new two-million-tonne capacity at Khushkera, Gurgaon in September 2007 and another 1.5-million-tonne grinding unit at the same location in December 2007. This could help the company capitalise on strong demand trends in the region.

The company appears well-placed to withstand cost pressures, with an operating profit margin that is significantly superior to similar sized players. The location of the company’s units help it to save on logistics costs. The State is also rich in limestone and gypsum, key inputs to cement production, also resulting in procurement advantages.

A captive power plant that meets a significant proportion of power requirements is a key contributor to cost savings. The company has recently commissioned a 18 MW thermal power plant to its existing 42 MW capacity and has further plans to augment captive power generation. Pet coke is used as fuel for the power plants, which is procured from a refinery in Panipat near the company’s plant.
Financials

Shree Cement reported a sharp decline in net profit, despite strong sales growth in the December quarter. For the quarter, net sales have increased 43 per cent to Rs.523.57 crores, on the back of higher despatches and firm realisations. However, despite higher volume growth and increased sales, the company recorded a fall in its net profit, mainly attributable to higher depreciation charges on the newly installed plants. The company follows an accelerated depreciation policy that results in cash profits being substantially higher than reported profits. The aggressive depreciation policy, while it results in subdued net margins, reduces tax incidence and bolsters cash flows.

Risks: Any significant fall in utilisation levels due to the capacity additions that would be coming on stream by FY-10 and the consequent drop in cement prices is a key risk to earnings. Rising costs of inputs are also a potential threat, in the face of limited pricing power.