Shree Cement Q2FY12 results analysis

Shree Cement announced its September 2011 quarter results on Friday, 12th November, 2011. The company's net sales were up by 19.4% on a YoY Basis to Rs 854 cr. Bearing in mind the monsoon season and the slow pick up in construction activity during the quarter, the company has performed better than other cement companies in its sector.

The highlight of the results was the company's Operating Performance, which grew by 42.3% on a YoY basis. Moreover, the Net Profit margins grew by 308 bps to 4.49%. This was on the back of improvement in the realisations and decent sales volume. Cement companies in the southern region maintained prices by cutting down production in order to offset the increase in input costs. However, the significant improvement in the margins was also due to the low base effect, as cement prices went down in the same quarter last year.

If we look at the QoQ performance, Shree Cement's net sales declined by 17%. This was due to a weak demand as compared to the previous quarter, and operating profits were down by 22%. The July-September 2011 quarter is the monsoon season, and typically, there is moderation in construction activity. The total cost as a percentage of sales rose by 150 bps on account of higher fuel prices and freight charges, which has been the major reason for the weak QoQ performance.

Going forward, we believe that the pickup in demand will remain slow because of higher interest rates, which may slow down construction activity and also delay some of the new projects due to higher cost of funding. Also, we usually see a shortage of labour due to the festive season, which hampers construction work in the month of November. Therefore, the pickup in demand is expected to be slow in the coming quarter, and would gain pace in Q4 FY12.

The stock closed at Rs 2025 on Friday, and was up by 1.25% on the NSE. So far, it has touched a high of Rs 2040 and a low of Rs 2000 in trade after the results announcement.