Shree Cement stock – good performance

The Shree Cement stock has been among the best performing cement stocks in 2004, having gained around 70.3 per cent versus a 28.93 per cent rise for the industry leader Gujarat Ambuja Cement and a 11.62 per cent gain for the Sensex. Both companies had earlier reported significant growth in their September quarter profit - in the case of Shree Cement, its profit after tax had grown 479 per cent to Rs 16.99 crore while Gujarat Ambuja’s consolidated net profit increased 477 per cent to Rs 100.99 crore.  

But why has Shree Cement outperformed its peers on the bourses? Shree Cement derives approximately 86 per cent of its sales from Northern India. This market already has a capacity utilisation of over 90 per cent and with no capacity enhancements on the horizon, it is expected to see demand-supply equilibrium in the next few months. In contrast, Gujarat Ambuja derives only about 30 per cent from the Northern region. Demand-supply parity in other regions is still some time away. Hence, the anticipated demand-supply equilibrium in the northern region is expected to result in further improvement in pricing power for players in this region. Yet, despite the sharp rise in CY04, the Shree Cement stock still trades at around 8.42 times estimated FY05 earnings, compared to a discounting of 13.9 times for Gujarat Ambuja, indicating that the excitement in the stock may not be overdone.