Shree Cement (SRCM) Q2FY22 EBITDA came 11% lower than our estimate. Lower than estimate is led by lower volume. Volume for SRCM has declined by 4% YoY and is contrary to its peers which have reported growth. This is due to its exposure in east region which was impacted from cyclone/heavy monsoon. But due to its cost leadership, sale of premium products SRCM EBITDA/t is better than estimate.

"Post the result, we have roll forward TP to FY24E at Rs 27,750 (earlier Rs 25,618) and upgrade the stock to HOLD. We continue to value SCRM at 18x , catalyst for stock performance is volume growth, capacity addition announcement and price hike. SRCM valuation premium to UTCEM is at 45% (versus highs at 80%) and historical average of 40%," stated IDBI Capital Equity Research.

Key highlights and investment rationale

Q2FY22 snapshot: SRCM Q2FY22 revenue increased by 6% YoY at Rs 32 billion. Absolute EBITDA was down 9% YoY at Rs 9 billion. On operational front, volume decreased by 4% YoY/ 8% QoQ at 6.3mt. Realization was flat QoQ at Rs 5104/t. EBITDA/t stood at Rs 1430 vs Rs 1,492 QoQ / Rs 1513 YoY. As Cost inflation is building in, Opex/t increased QoQ by 4% to Rs 3674/t. PAT stood at Rs 6 billion (up 6% YoY).

Capacity addition plans intact: SRCM plans to set up an integrated plant with cement capacity of 3.5mt, clinker of 3.8mt at Nawalgarh Tehsil, Rajasthan and 3mta GU at Purualia (West Bengal). This entails an investment of Rs 35 billion and Rs 7.5 billion respectively. From current capacity of 46mt, SCRM’s plan to double its capacity to ~80mt in the next 6-7 years and 57mt in the next three years.

Cement prices inching up: With the end of monsoon, price increase has been witnessed in most of the regions in Oct-21. This will help in setting off the cost inflation. For SRCM we are modeling in YoY ASP increase of 2%/ 2% and EBITDA/t of Rs1433/ Rs1458 for FY23E/FY24E.   

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