Shree Cement expects good run in North India

Shree Cement expects good run in North India
Published: 14 December 2004

Cement prices are expected to firm up in the coming months, on the back of nearly 8%-9% growth in demand. Rajasthan-based Shree Cement is confident of achieving a good growth in both its top and bottom line.

MK Singhi, ED, Shree Cement, told CNBC-TV18, "Supply is now almost matching demand, and it looks like in the next three months, till March, demand will definitely be more than supply, and that will mean the market will be ready to give a better price. The present price is still less than the price in March 2004, so that gives an indication that the prices will go up to some extent, and that will be a good time for the cement industry, especially in North India. Till November, the growth in demand is about 8%, and it should remain so for the next four months also, the way the manufacturing sactor is showing growth in North India. Since no new capacities are coming up, the prices should be good in North India."

Shree Cement sells 90% of its product in North India, where demand is strongest, with up to 10% going to Uttar Pradesh. Its present capacity is 2.8 million tonnes, but it does not have a share in the export market at all. It enjoys up to 11% of the market share in North India.

The company enjoys a low power cost, due to the 36 MW captive power plant at its disposal, and has the lowest variable cost per tonne in India. Because of its proximity to the northern parts of India, Shree also has a relatively low freight cost, which results in a higher realisation. It’s captive limestone reserves are estimated at over 400 million tonnes.

In the second quarter results, that were declared recently, Shree recorded a 19% year-on-year jump in net sales, up from Rs 117.43 crore to Rs 140.08 crore. Singhi expects the company’s topline growth to continue, going forward, on the back of strong demand. "For Shree Cement, our sales should be higher by more than 12%, and our growth in volume should be up by 5%. That augurs well, and gives good numbers in comparison to last year. The performance of the first six months was also good," he said.

In Q2, the company’s net profit climbed year-on-year 479%, from Rs 2.93 crore (Rs 29.3m) to Rs 17 crore (Rs 170m), while its operating profit was up 70%, from Rs 23.04 crore (Rs 230.4m) to Rs 39.19 crore (Rs 391.9m). Operating margins soared 836 basis points, from 19.62% to 27.98%. With a 1.2Mt capacity greenfield cement plant planned by next December, margins will also improve.

He said, "Our margins are quite comfortable, and will be better with the new plant coming up. We are funding the plant at the moment with internal accruals of Rs 100-200 crore (Rs 10-20bn), and that will not bother the operating parameters of our existing plant. Our optimisation in logistic costs and energy management should also make our operating margins better."

However, there are concerns that a rise in coal prices and freight charges could dent the company’s profitability. Pet coke prices are up by more than 50% from last year, and Shree is totally dependent on pet coke for its kiln and captive power plant.