Q1FY24 Review: Shree Cement: In-line results; accelerating capacity additions

28 Jul 2023 , 01:23 PM

Shree Cement’s (SRCM) Ebitda grew by 14% YoY to Rs9.3bn – in line with estimates. Company reported a strong volume growth of 19% YoY (cap. utilisation of 76%), driven by strong growth in East. However, lower cement realisation (down 4.4% YoY) restricted profit growth (Ebitda/t down 4% YoY to Rs1,046). Company is accelerating its capacity addition (announced 12mtpa addition in North and South) to capitalise on strong demand momentum. Analysts of IIFL Capital Services estimate SRCM to deliver 23% Ebitda Cagr over FY23-26, as they build in 12% p.a. growth in volumes and 10% p.a. increase in Ebitda/t to Rs1,240 by FY26 (large improvement in FY24 itself). However, the stock trades at 16.5x FY25 EV/Ebitda, fairly pricing in expected growth. Analysts of IIFL Capital Services maintain Reduce. 

Strong volume growth; weak realisations restrict profit growth: 

SRCM’s volumes grew by 19% YoY and flat QoQ to 8.9mtpa, in line with estimates, supported by strong growth (+25% YoY) in the Eastern market (possible at the expense of Dalmia Bharat). As such, blended capacity utilisation was 76% – up 1100bps YoY and flat QoQ. The strong volume growth was not fully captured in Ebitda (+14% YoY; in line with IIFLe) as Ebitda/t declined by 4% YoY (was up 3.4% QoQ) to Rs1,046. Pressure on the margins was due to lower cement prices – down 4.4% YoY and 1.6% QoQ to Rs4,771/t – as per management. 

New capex in North and South announced: 

Shree Cement has accelerated its capacity addition plans, as it focuses on capitalising on strong underlying demand aided by increased infrastructure capex and sustained housing demand. With the new announced capacity in North and South (12mtpa), SRCM’s total capacity would increase to 68.4mtpa by FY26. Pace of capacity addition has increased from 6% p.a. seen over FY18- 23 to 14% p.a., targeted over FY23-26E. As such, company has targeted to reach 80mtpa by FY30. Separately, SRCM shared that overall pricing remains weak in July (though some increase seen in North), but falling power and fuel prices to support profitability. 

No update on IT surveys, MCA inspection: 

Analysts of IIFL Capital Services have largely maintained their estimates expecting volumes to grow at 15% YoY to 36.5mtpa (company guidance of 36mtpa) and Ebitda/t to improve by 23% YoY to Rs1,124. Company did not share any more details on the recent IT raids and notice from MCX for inspection of books, as these are under investigation. Analysts of IIFL Capital Services value SRCM at 15x 2YF EV/Ebitda and TP of Rs23,500.