Cement demand for first 7 mths of FY10 up 11%: Shree Cements

HM Bangur, MD of Shree Cements (BOM:500387) said that cement demand is at 11% for the first 7 months. He feels that margins will be impacted in the near-term due to oversupply. Shree Cements is selling 30 MW of power currently and will add 145 MW by June CY10. The company will compensate the pricing pressures by higher volumes, revenues from power, he added.

On Cement sector, Karvy Broking is of the view that there is oversupply in the southern region and the cement prices are set to decline. Input costs have bottomed out. Southern India is on a southward.

Karvy maintain underperform on Cement sector. It feels that these are first sign of oversupply in south. About 30 mt is likely to be added in H2FY10. Overall capacity utilisation will drop to 75%. A price correction of 4% is likely in Q4, and 7% in FY11. Weak monsoon may lead to lower rural demand. Stock valuation may be de-rated in next 6 months.

Karvy has recommended sell on ACC, with price target of Rs 598, sell on Ambuja Cements (BOM:500425), with price target of Rs 72, underperform on Grasim, with price target of Rs 2303, underperform on UltraTech Cements, with price target of Rs 665 and underperform on India Cements, with price target of Rs 105.

At a time when other cement companies are still looking at adding cement capacities, Shree Cements is putting to good use its sizeable cash flows of Rs 35 billion+ (expected over FY10-12) to scale up its power business, which shall provide Shree Cements with enough ammunition to protect its profitability from expected FY2011 downturn in cement prices. The company posted good quarterly numbers, topline was in-line with expectations, PAT was higher than estimate. Power business contributed Rs 78 crore to the revenues of the company. The company continue to enjoy benefits of price hikes, demand uptick in North towards Q1-end.

Shree Cements told CNBC-TV18 that power business contributed Rs 78 crore to the revenues. The company sold 35 MW of power in Q2FY10, and will sell 50 MW in Q3FY10. The company aims at FY11 cement production capacity at 10.5 mt, FY12 at 12 mt. Going forward, Shree Cements expect margins to come under pressure due to pricing pressure. The company has no plans to raise money for power foray.

Shree Cements Q2FY10 (YoY) revenues stood up 44% at Rs 909 crore Vs Rs 629.18 crore, CNBC-TV18 estimate was Rs 906.7 crore, PAT stood up 169% at Rs 289 crore Vs Rs 107.49 crore, CNBC-TV18 estimate was Rs 224.7 crore and OPM stood at 48.8% Vs 29%, CNBC-TV18 estimate was 45%.

The company has announced foray into commercial power business. The company is going to set up a 300 MW thermal power plant in Beawar, Rajasthan. It has earmarked Rs 1,200 crore to be invested in next 2 years. The company would sell power generated from plant in open market and would not utilize it for captive purpose. The company will soon award contract to develop power plant and is currently having the final round of discussion with four firms, one each from the US and China and two domestic entities. Proposed unit, which is expected to start operation within the next 2 years, would be a thermal power plant and coal for the purpose would be fully imported.

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