Shree Cements share price has caught my attention since last 1.5 months. Its been falling steadily.
Why Shree Cements?
If we will prepare a list Top 100 stocks in terms of Market Capitalisation, Shree Cements will appear in this list.
In fact as per my list, its Rank is #54th in the list.
High Market Capitalisation means, its one of the publics favourites.
Such stocks should always be on ones watch list.
Major price falls in such stocks may make them trade at attractive price levels.
Shree Cements share price fall?
On 3rd-Sep’18, its price was trading at Rs.19,000 levels.
Today (19th-Oct’18), Shree Cement share price is trading at Rs.14,600 levels.
This is a price dip of 23% in matter of 45 days.
In a normal market, such large dips are hard to locate. But this may be due to the recent bear market trend of Sensex and Nifty.
So this is about its price trend. But what about its business fundamentals?
May be because of the weak business fundamentals (falling sales, profits etc) of Shree Cements, its market price is falling?
So lets dig deeper into the financial reports of Shree Cements…
Business Fundamentals of Shree Cements
We will analyse business fundamentals of Shree Cements based on the following numbers:
- Sales trend.
- Net profit trend.
- EPS trend.
- Reserves Trend.
- Cash flow from operations trend.
#1. Sales Trend
Lets see what has been the sales growth trend of Shree Cements in last 3 years, 5 years, 7 years and 10 years.
We will also see the trend in TTM (Trailing Twelve Months).
- 3Y Growth: 21.27%.
- 5Y Growth: 10.80%.
- 7Y Growth: 7.57%.
- 10Y Growth: 13.73%.
On Mar’18, Shree Cements posted a sales figure of Rs.9,833 Crore. Its reported TTM Sales of Rs.10,314 Crore.
So in terms of TTM vs last reported annual earning, there is a growth in sales of 4.89%.
So in terms of sales growth, there was no such alarms that its share price should fall by 23 odd percent in just 45 days.
In fact, sales trend looks reasonable.
[Note: In last 11 years (TTM + 10 years), the sales has dipped only 3 times compared to its last financial year reports]
Lets jump to another business fundamental.
#2. Net Profit
Lets see what has been the PAT growth trend of Shree Cements in last 3 years, 5 years, 7 years and 10 years.
We will also see the trend in TTM (Trailing Twelve Months).
- 3Y Growth: 6.53%.
- 5Y Growth: 14.93%.
- 7Y Growth: 14.31%.
- 10Y Growth: 9.27%.
On Mar’18, Shree Cements posted a PAT figure of Rs.1,386 Crore. Its reported TTM PAT is Rs.1,223 Crore.
So in terms of TTM vs last reported annual earning, there is a dip in PAT by of 11.7%.
What does it mean?
There is a probability that Shree Cements can post a lower PAT numbers in Mar’19 compared to Mar’18.
This can be one of the triggers which can cause price fall.
But I will say that the numbers are still not as bad.
[Note: In last 11 years (TTM + 10 years), the sales has dipped 4 times compared to its last financial year reports]
#3. EPS Trend.
Lets see what has been the EPS growth trend of Shree Cements in last 3 years, 5 years, 7 years and 10 years.
We will also see the trend in TTM (Trailing Twelve Months).
- 3Y Growth: 6.53%.
- 5Y Growth: 14.93%.
- 7Y Growth: 14.31%.
- 10Y Growth: 9.27%.
EPS & PAT Trend are similar as Shree Cements has not issued more shares in the market in last 10 years.
Number of shares outstanding remained same at 348.37 lakhs number shares in last 10 years.
This is a good indicator for existing and potential shareholders of Shree Cements.
On Mar’18, Shree Cements posted a EPS figure of Rs.397.94 Crore. Its reported TTM EPS of Rs.351.21 Crore.
So in terms of TTM vs last reported annual earning, there is a dip in EPS by of 11.7%.
Markets tend to react strongly for any adverse changes in EPS.
#4. Reserves Trend
Lets see what has been the Reserves growth trend of Shree Cements in last 3 years, 5 years, 7 years and 10 years.
We will also see the trend in TTM (Trailing Twelve Months).
- 3Y Growth: 9.13%.
- 5Y Growth: 13.56%.
- 7Y Growth: 18.36%.
- 10Y Growth: 22.08%.
In terms of long term Reserves growth, the performance of Shree Cements has been quite robust.
#5. Cash flow from operations
Lets see how what has been the Cash flow growth trend of Shree Cements in last 3 years, 5 years, 7 years and 10 years.
We will also see the trend in TTM (Trailing Twelve Months).
- 3Y Growth: 6.25%.
- 5Y Growth: 6.05%.
- 7Y Growth: -0.36%.
- 10Y Growth: 8.89%.
Lets compare cash flow trend with the PAT trend…
| – | Cash Flow Growth | PAT Growth |
| 3Y Growth | 6.25% | 6.53% |
| 5Y Growth | 6.05% | 14.93% |
| 7Y Growth | -0.36% | 14.31% |
| 10Y Growth | 8.89% | 9.27% |
Wha does this comparison prove?
In long term (10Y) and short term horizons (3Y), collection and PAT reporting has been almost at sync.
But in 5Y and 7Y durations, companies “cash flow from operations” was not keeping pace with PAT growth.
But this must also be kept in mind that, companies engaged in constructions business always has to deal with negative cash flow situations.
#6. Financial Ratios
Analysis of financial ratios gives a different perspective about the company.
But here again, we will try to see Shree Cements from perspective of trends, and not only on basis of absolute values.
Study of trends brings forth those deeper-fundamentals about the business which otherwise remains hidden.
#6.1 Profitability.
To study the companies, profitability, we will use two financial ratios:
- ROE
- ROCE.
In last 10 years, ROE and ROCE of Shree Cements has been falling continuously.
Such a falling trend is not a good sign for potential investors.
#6.2 Debt Dependency.
To study debt dependency, we will use a unique ratio:
- Debt / Total Expense.
What this ratio will tell us?
Out of the total expense incurred by the company, what percentage of it is financed from debt.
As current ROE and ROCE of Shree Cements is not as high, hence use high debt is not recommended.
This way, Shree Cements has done well. It has been gradually reducing its debt dependency in last 10 years.
This value is also complemented by its robust growth of ‘Reserves” in its balance sheet.
#6.3 Liquidity Ratio
To understand the liquidity position of the company, we will use the following two ratios:
- Days sales outstanding.
- Days inventory outstanding.
Days sales outstanding is a measure of “number of days” it takes the company to “collect payments after sales”.
Days inventory outstanding is a measure of “number of days” it takes the company to convert its “inventory into sales”.
The lower are these numbers the better.
In terms of trends, we can see that both the liquidity ratios has only increased with time.
This is not a good indicator for potential investors.
#7. Intrinsic Value
This is perhaps one of the most important indicator for any stock.
Generally people use financial ratios like P/E and P/B ratio to guess if the stocks is trading at right valuations or not.
But again, this is only a guess work.
If we have to only guess, I will suggest the usage of intrinsic Value over ratios. Why?
Because it gives a better realisation of the true value of the company.
I generally use my stock analysis worksheet to estimate the intrinsic value of my stocks.
I have used the my worksheet to estimate the intrinsic value of Shree Cements.
#8. Overall Rating
Till now what we have done is, to estimate the individual parameters of Shree Cements.
In some aspects, Shree Cements has fared well, but in some it has not done so well.
So what should be the overall conclusion?
Frankly speaking, arriving at this is not so easy.
I generally use my stock analysis worksheet to arrive at a overall conclusion.
Based on an algorithm, the worksheet tries to forecast an overall grade for its stock.
For shree cements, the overall grade as been as shown below:
This stocks is ideal for long term investors inspite of the risks.
But Shree Cements looks to be a good company.
Include Shree cements in the watch list. Wait for further price correction of say 15%-20%.
We may be looking at a reasonable good opportunity.
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