India’s Shree Cement fails to power up

India’s Shree Cement fails to power up
Published: 30 December 2010

Analysts at LKP have downgraded Shree Cements to underperformer in its December 28, 2010 research report.

A laggard performance from its power division has been due to extended monsoons reducing the demand from the manufacturing segment amidst competition from low cost hydropower generation. Post foraying into power segment, Shree has not entered into long-term contract for supplying power. With the seasonal nature of demand for merchant power, falling power realizations and very low volumes of power sales reported in Q2FY11E, LKP is sceptical on its power business. This could drive down the overall profitability of the company.

Shree’s cement as well as power business both uses petcoke as its feedstock. Shree has not secured to source its key raw material requirement for its current as well as future expansion.”

“Cement realization has been continuously under pressure after peaking out in Q2FY10. Since then the prices have corrected by 23%. Prolonged monsoon further delayed the demand for cement keeping prices under pressure. The key reason for steep margin compression is sharp rise in petcoke price. Petcoke prices in Q2FY11 have increased by 56%. Going forward we expect petcoke prices to remain flat with an upward bias. Thus, we continue to see margin pressure going forward.”

“Shree, one of the most efficient cement company, lately has diversified into merchant power business by setting up a total 443 MW power plant which will be fully operational my mid FY12 (143 MW is fully operational). This step of de-risking the cyclical cement business model by foraying into power is expected to dampen the overall profitability. Thus, we downgrade the stock to underperformer with a price target of Rs2001. We have valued the cement business at EV/TON of US$110 and the power business at P/BV of 0.85x,” concludes the LKP research report.