Shree Cement’s (SRCM) Q2FY11 operating results were below expectation with a margin of 19.8% against our estimate of 26.6%. Despite input cost pressure, owing to weak demand realisations dropped by 9.3% leading to margin depletion. Power business too witnessed a decline as good monsoons reduced offtake. However, depreciation charges at Rs1.3bn were below our estimate enabling SRCM to post a marginal profit of Rs105mn.

Monsoon impact: Above average monsoons across North India alongwith flood conditions in some pockets led to a scale down in construction activity. Cement dispatches were down 6% YoY to 2.1mn mt while clinker sales dropped by half to 0.2mn mt. A weak demand and over supply conditions affected realisations which were lower by 9.3% at Rs3,085/mt. Consequently, cement segment sales were lower by 19.9% at Rs6.9bn.

Lower power offtake: SRCM’s power business too was impacted during the quarter. Monsoons led to lower demand for power resulting in a 65% sequential drop in units sold during the quarter to 50mn. Power segment sales were lower 27.6% YoY at Rs315mn.

Margins below estimate: In Q2FY10 record high realisations and low input cost had helped SRCM post the record margin of 47.3%. In sharp contrast during the quarter, in addition to the poor realisations, the company faced cost pressures in both raw material and fuel. Although production levels were lower, power and fuel costs were higher by 29.5%. Margins contracted 2,750bps YoY to 19.8% and were lower than our estimate of 26.6%. EDITDA was lower by 67.8% YoY at Rs1.4bn. With a depreciation of Rs1.3bn, SRCM struggled to post a profit of Rs105mn.

Outlook: We have lowered our FY11E cement volume estimates by 6% to 10mn mt. Accounting for an increase in power and fuel costs we have reduced FY11 margin estimates by 300bps to 32.1%. Consequently FY11 and FY12 EBITDA is lower by 15% and 9% respectively. Our earnings estimate for FY11 and FY12 are Rs133 and Rs168 respectively.

VALUATIONS AND RECOMMENDATION The stock is currently trading at 5.2x FY12E EV/EBITDA. We reiterate our ‘BUY’ recommendation on the stock with a revised target price of Rs2,580 (earlier 2,697) discounting FY12E EBITDA 6x.