Published on 23/10/2019 11:55:56 AM | Source: HDFC Securities Ltd

Neutral Shree Cement Ltd For The Target Rs.20,000 - HDFC Securities

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All well, issue equity puzzling...

 We retain NEUTRAL on Shree Cement (SRCM) with TP of Rs 20,000. Our TP implies cement EV of USD 215/MT.



* In 2QFY20, Shree reported stellar performance as its standalone net sales/EBITDA/adj PAT rose 8/45/7% YoY to Rs28.02/8.44/3.09bn resp.

*  Strong trade focus bolstered realisation:

Sales vol rose 2% YoY, led by 5% contribution from south plant while sales in north/east fell 4%. As Shree increased its trade sales to 80% in the mix in 2Q, its NSR was lesser impacted by non-trade price volatility, falling 1% QoQ (vs. industry trend of 5-8% decline). This led to a robust 9% NSR gain YoY.

*  Decade high unitary EBITDA:

Co reported 3/2% YoY/QoQ opex decline on lower fuel cost and robust cost controls. These buoyed unitary EBITDA by 51/1% YoY/QoQ to a decade high of Rs 1,451/MT.

*  Stellar 1HFY20:

EBITDA in 1H surged 42% YoY to Rs 17.46bn, on robust Rs 1,447/MT unitary EBITDA despite a 7% vol decline. Working capital reduced by Rs 3.14bn. Shree spent Rs 7bn towards on-going expansions

* Fund raising for inorganic opportunities:

Shree’s board approved QIP of upto Rs 30bn, to fund inorganic acquisition (without major debt additions). As the promoters won’t infuse any capital, we estimate their holdings will dilute upto 300bps to 62%. We find this unnecessary (owing to an already strong bal sheet) and potentially negative for Shree’s premium valuations. See inside for our detailed view on this development.

 *  Near term outlook:

Shree will commission green-field GUs in Cuttack/Pune (3mn MT each) by 4QFY20/ 3QFY21 respectively. We expect Shree’s robust unitary EBIDTA (1HFY20 ~Rs 1,400/MT, its best ever) to sustain through FY20-22E on op cost tailwinds, increased trade focus and expected demand recovery.



We retain NEUTRAL rating with an SOTP based TP of Rs 20,000 (Standalone cement/power biz at 15/5x Sep21E EBITDA and Gulf assets at 1x BV). The stock currently trades at 14.7/13.5x FY21/22E EBITDA and EV of USD 200/MT. Despite ascribing premium valuation to the cement biz for its industry leading growth andreturn ratios, the stock price offers a limited upside.


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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475


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