Q4FY23 Review: Shree Cement: Quarter disappoints; outlook robust

Shree Cements’ (SRCM) Q4FY23 Ebitda was down 4% YoY – below analysts’ of IIFL Capital Services and consensus estimates. High-cost inventory and subdued prices in the East impacted profitability. However, outlook remains robust with the company guiding to: 1) Achieve faster-thanindustry volume growth: 13-14% YoY vs 7-8%. 2) Improving profitability through narrowing price gap with the industry leader (expect Rs50/t contribution from premiumisation). iii) Become a pan-India player with 80mtpa capacity by 2030. Although SRCM is well placed to benefit from likely upcycle in the sector, this is discounted in valuation.

Q4 miss estimates: 

SRCM’s Q4FY23 operational performance was weak – Ebitda was down 4% YoY to Rs8.72bn as high-cost pressures impede profitability. Ebitda/t fell 11% YoY but was up 15% QoQ to Rs1,011/t. Higher Power sales in Q4 led to QoQ spike in blended realisations and Power and Fuel costs (analysts of IIFL Capital Services estimate on QoQ basis, non-cement sales including Power sales were 3x). Adjusting for this, management shared that Cement realisations and fuel consumption cost are flat QoQ. Volumes grew 10% YoY to 8.8mnt – in line with industry. Q4 capacity utilisations improved to 76% vs 69% QoQ and 74% YoY.

Focus on premiumisation and efficiencies to drive industry leading profitability: 

SRCM’s high-cost fuel inventory resulted in steady fuel consumption costs QoQ at Rs2.53/kcal. Benefit of declining petcoke prices (spot: Rs1.8/kcal) to accrue in FY24. For Q1FY24, management has guided for 7% QoQ decline in fuel cost to Rs2.35/kcal. Moreover, the company remains focussed on narrowing the pricing gap with other leading players (doubling of premiumsation products to 15% + marketing/brand strategy). In addition, it would continue to focus on cost initiatives such as adding green power, railway siding, increasing AFR share, etc. Such initiatives combined would improve Ebitda per tonne.

Expansions on track; valuations priced-in: 

Purulia GU (3mtpa) is likely to get commissioned in June’23; while Nawalgarh and Guntur expansions remain on track. FY24 budgeted capex is Rs30-35bn; similar to FY23. Analysts of IIFL Capital Services have slightly tweaked our FY24-25 Ebitda estimates by 1% each to incorporate benefits from various cost initiatives. 

Analysts of IIFL Capital Services value the stock at 15.5x FY25 EV/Ebitda. Maintain REDUCE with unchanged TP of Rs22,800.