Buy Shree Cement Ltd For Target Rs.25,200 - HDFC Securities
Shree Cement Ltd. (SCL) is the country's 3rd largest cement producer and leading brand at North India region. It has an 8% market share in India and ~24% market share in North India, having a total 44.4MTPA cement producing capacity (40.4 MTPA Standalone). It has 55% capacity located in North India followed by 25% capacity in East India and remaining in other regions. SCL is also expanding its capacity in the west and east India to further regional diversification. SCL has a strong track record of consistent capacity expansion (4x in last 10 years) which leads to a sustainable higher than industry volume growth. Along with this, its robust net debt free cash rich balance sheet. coupled with its stringent cost control and competitiveness makes the company one of the lowest cost cement producer among its peers.
We expect that Covid-19 led lockdown and slowdown in the economy will lead to subdued growth in volumes for Shree Cement for FY21 but benign raw material price and aggressive control on variable costs are likely to drive EBIDTA growth. The industry has a high dependence on real estate and infra sector which is expected to be impacted due to expected slowdown in the economy. Going forward, we expect, a gradual recovery in cement demand and volumes are likely to pick-up from H2FY21 onwards. In the case of Shree Cement, incremental volumes from the commencement of additional capacities will result in a lower decline in volumes compared to the industry. Also, on the demand side, key growth drivers are likely to be picked up in rural housing, Pradhan Mantri Awas Yojana (rural), Pradhan Mantri Gram Sadak Yojana and spending on key infrastructure projects. Eastern India region is largely underpenetrated and thus has high growth potential compared to the rest of our country, where the company having a 28% of capacity FY21E.
Valuations and View:
We expect, that the company will get benefits from the leading position with an especially strong share in North India and East India. Also, captive power plants (~742 MW of captive power plants – 45% of requirements) and stable working capital augur well for Shree Cement. We like Shree Cement due to its steady profitability owing to cost leadership among peers. Shree Cement announced a Capex plan to increase its standalone installed capacity to 57MTPA by FY24E (vs 40MTPA in FY20); from which 6MTPA will be commenced in Q3FY21E. We expect, 7% CAGR in top-line and 24% EPS CAGR over FY20-22E. At the LTP, the company is trading at FY22E EV/T of $245.8/T, 17.1xFY22E EV/EBITDA – the highest EV/T valuation among peers. We feel the base case fair value of the stock is Rs.22900 (FY22E EV/T of $235/T, 16.3xFY22E EV/EBITDA) and the bull case fair value is Rs.25200 (FY22E EV/T of $258.5/T, 18.0xFY22E EV/EBITDA). Investors can buy the stock on dips to Rs.21200-21400 band (FY22E EV/T of $219/T, 15.2xFY22E EV/EBITDA) and add more on dips to Rs.19800-20000 band (FY22E EV/T of $205/T, 14.2xFY22E EV/EBITDA).
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