This week Shree Cement’s stock price breached its yearly high. And while that isn’t surprising in itself, the rally came against the backdrop of stellar results for the months of July, August and September, when most businesses were still struggling to cope with the pandemic. So we thought we could look at the Shree Cement and its performance, particularly considering it’s part of the Nifty 50 now.
Cement is an important commodity. But here’s the thing. There’s nothing really separating my cement from yours. And while you could argue that the quality of cement differs quite substantially between different manufacturers, most people simply can’t tell the difference. Especially retail customers. So the only way for a cement company to make its mark is by painstakingly building its reputation or do something fundamentally different.
And if you’re wondering what Shree Cement did to get to the top, this snippet from one of our past issues should give you some idea —
To put it succinctly, these guys are Industry Cost leaders. And before we get to breaking down what Cost Leadership means, we need a crash course on how you make cement.
“First you gather your limestone. Then you burn it. By burning it, we don’t mean light it on fire which obviously isn’t going to happen. Burning it means to heat it like you mean it.”
So instead of lighting it up with a matchstick, big companies like Shree Cement heat their limestone in large ovens using fuel (like Pet Coke). And since they’ve got long-standing relationships with other petrochemical companies, they can source this stuff for pennies on the block. As a result, they have a veritable cost advantage here. Hell, they even have their own power plants to supply cheap electricity. And that means our company can sell its cement for the same price as everyone else and still be better off because they’re producing this stuff at cheaper rates.
So, in essence, a cost leader tries to build a sustainable advantage by optimising its operations. And boy have they built a sustainable advantage or what? They were the first manufacturers to start using Pet Coke as fuel. They have constantly fiddled with other raw materials to keep pushing costs lower. And they’ve only expanded when they desperately needed to.
For instance, if you haven’t noticed, we have had a bit of a slump in the Real Estate/Infra Sector over the past 10 years or so. And since these real estate developers happen to be primary consumers of cement you’d have expected Shree Cement to be under a bit of pressure.
In fact, most of their peers have had a terrible time dealing with this whole tragedy. Look at cement manufacturers who resorted to reckless expansion on the back of cheap debt between 2000 and 2010. They crumbled under the debt burden during the crisis. Meanwhile, Shree Cement managed to consolidate ground and emerge as one of the leading cement manufacturers in the country, thanks to the fact that they only expanded when they needed to.
And through it all, Shree Cement has emerged as one of the top cement manufacturers in the country. Granted they are only the 4th largest cement manufacturer in India but they are one of the most profitable entities and boast industry-leading margins. For instance, they have an operating margin of 25–30% compared to an industry average of 15–20%. Their net profit margin stands at 12–14%, compared to their competitor’s margins of 7–10%.
Also as Covid was ravaging India, Shree Cement had another stroke of luck. According to multiple reports, Cement demand in northern India began seeing a more robust recovery compared to southern India. Analysts attributed this to lower infection rates in rural/semi-urban regions, better availability of labourers, and government initiatives to generate employment in these areas that benefited infra projects and in turn cement manufacturers.
And considering Shree Cement largely tends to customers in the North, the benefits of the said recovery accrued to them in full. Having said all this, however, it’s imperative to remember that the long term prospects of the industry still hinge on the real estate sector. Think Housing — Over 60% of the demand comes from housing alone. So if demand for houses takes a backseat, then we could see companies like Shree Cement struggle.
But as it stands, cement stocks are rallying and Shree Cement is leading the pack.
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