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S. Vaidya Nathan

EXPOSURES can be contemplated in the stock of Shree Cement at Rs 90 by investors with a penchant for high risk. As a small player in the industry , the risks associated with Shree Cement are higher than the industry bigwigs such as Gujarat Ambuja Cement, ACC, Grasim and Madras Cement. Business Line had recommended buy (high-risk) and hold on the stock in January 2003. We continue to reiterate our view despite the 74 per cent rise in the stock price.

The higher valuation level appears to be linked to the improvement in its profitability and the likelihood of cement prices stabilising at higher levels than in the past three years. This is in contrast to trends when a sharp uptrend in the stock price was linked to the possibility of a strategic partner being roped in. This prospect will remain a factor in the pricing of the stock, as Shree Cement is one of more attractive options for any potential MNC entrant into the Indian cement market. The company has, however, indicated that it has shelved earlier plans in this regard.

Investments can, however, be pegged to the likelihood of a sizeable increase in earnings. The steady increase in the operating profit margins over the last three quarters is a pointer to this. In the April-June quarter, profitability levels improved by six percentage points despite the hike in the excise duty levels. In addition to better realisations, a tight rein-in on expenses has helped.

The pressure of higher interests costs and depreciation charges, evident in the past four quarters, is also likely to ease. The Rs 120-crore investments made in a captive power plant may bring savings in energy costs and help Shree Cement maintain its high operating rates in excess of 100 per cent. This level of operating rates also means that the company is dependent on higher cement prices and check on costs to drive its earnings.

What is important is the company's resilience in tough times. In the past two years when cement prices had remained at lower levels, Shree Cement managed to operate with healthy profitability — an important fact as its units are located in the hugely cement surplus state of Rajasthan.

The better discipline in capacity creation and the higher growth rate in the demand for cement in the northern markets are likely to narrow the demand-supply gap at a faster pace than other regions. Over a two-year timeframe, this is likely tolead to better pricing power in the hands of producers.

As one of the more efficient units, Shree Cement would be a big beneficiary of any further improvement in cement price levels.

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