Strong volume growth and lower opex positives but valuations unattractive
* Q2 results were ahead of our estimates, driven by higher realization (down 1.9% qoq vs. estimated decline of 4.8%) and lower opex. EBITDA stood at Rs9.9bn vs. estimate of Rs8.2bn and OPM stood at 32.7% vs. estimate of 27.4%.
* Key positives: 1) cement volume growth of 16.5%, capacity utilization of the South plant increased to 67-68% from 30-35% in Q2FY20; 2) realization decline at just 1.9% qoq; and 3) 12% yoy decline in variable costs.
* SRCM has announced clinker capacity expansion in the East region. Grinding units (GU) in Odisha and Maharashtra will be commissioned in Q3. SRCM has plans to increase its capacity to 57mt from 40mt in three years and 80mt in six years.
* We raise FY21-23E EBITDA by 4-6% on better Q2 and higher realization assumptions. Valuations at 19.2x/16.7x EV/EBITDA and EV/ton of US$227 appear rich and leave little room for disappointments. Average RoCE will be 16.8% between FY21E and FY23E vs. 18.7% between FY13 and FY20. We maintain Hold rating with a TP of Rs23,740.
Volume improves across regions, lower costs support profits:
SRCM benefited from demand improvement in its key markets (North and East regions) and lower opex in Q2. Management indicated that volume recovery was across regions for SRCM. Sales volumes increased 14.2% yoy, driven by 16.5% growth in cement sales volumes. Sales volumes of premium products improved to 6.5% in Q2FY21 vs. 4% in Q2FY20 and 4.5% in Q1FY21. Opex/ton was down 9% yoy, led by a 12.4% decline in variable costs. Employee cost/ton was down 18% yoy. Employee cost will be at Rs1.75bn every quarter. Lower lead distance (453km vs. 475km in Q1) led to a 4.4% qoq decline in freight costs. Other expense/ton dropped 5.5% yoy. Higher volumes and lower opex led to 17% yoy growth in EBITDA with a 2.6pp yoy improvement in OPM. EBITDA/ton stood at Rs1,513 vs. Rs1,475/Rs1,421 in Q2FY20/Q1FY21. Depreciation was down 34.9% yoy. Lower depreciation and higher other income led to a 73.8% increase in profits. The UAE subsidiary posted EBITDA of Rs117mn vs. Rs311mn in Q2FY20 and a loss of Rs127mn in Q1FY21.
Raise estimates on better Q2/higher prices but maintain Hold on rich valuations:
We raise EBITDA estimates by 4-6% on better Q2 results and a 1% increase in realization assumptions. Historically, SRCM has been ahead of most of its peers in capacity expansion, which has helped it in gaining market share. The company has aggressive growth plans (doubling of capacities in six years), though there has been some delay due to the Covid-19-led demand disruption. Capex/ton for SRCM at Rs4,814 (between FY11 and FY20) is much lower than industry peers and liquid cash of Rs70.9bn at Sep-20-end will help in growth plans. SRCM has traded at an average EV/EBITDA of 19.5x between FY13 and FY20 when average RoCE of 18.7%. We expect RoCE to be at 16.8% between FY21E and FY23E. Valuations at 19.2x/16.7x EV/EBITDA and EV/ton of US$227 appear rich and leave little room for disappointments. Maintain Hold with a TP of Rs23,740 (17x Dec-22E EV/EBITDA). Key risks: higher demand in its markets which may lead to higher cement prices.
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