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Company Background

Shree Cement Ltd. (Shree), promoted by Mr. H M Bangur, Managing Director, is India's third largest cement manufacturer, with ~8% market share, sold under “Shree Jung Rodhak, Bangur, Rockstrong, Roofon and Bangur Power” brands. It has total cement manufacturing capacity of 47.4 mn tpa (mtpa) spread across North (~51%), East (~30%), Central (~4%) and South (~6%) India and UAE (~8%) and co-generation power capacity of ~750 MW including ~242 MW from waste heat recovery system (WHRS), solar power plants and wind power plants. Shree is the largest cement producer in North India, with a capacity of 24.3 MTPA, enjoying ~24% market share. The Company also started commercial sale of power in FY09, contributing ~4.5% to sales in FY20.

Investment Rationale

Healthy volumes and better realization ensured better performance

* During Q1FY22, net sales of Shree rose by ~47.9% y-o-y to ~Rs 34.5 bn. Volumes dispatched increased by ~38.7% y-o-y to ~6.84 million tons (mn tn) on a lower base driven by sustained demand momentum in East and North India. Blended realisation witnessed an increase of ~6.6% y-o-y and ~4.7% q-o-q to ~Rs 5,043/tn, as a result of price hike undertaken by the Company. However, owing to Covid-19 second wave induced lockdown restrictions, Shree witnessed a drop in volumes dispatched by ~16.8% q-o-q, resulting in a sequential top line de-growth by ~12.8%. Capacity utilization for the quarter was ~63% against ~49% and ~81% reported in Q1FY21 and Q4FY21 respectively.

* During the quarter, UAE operations y-o-y delivered better results with an EBITDA of ~Rs 94.5 mn as compared to negative ~Rs 126.5 mn in Q1FY21. However, q-o-q the performance remained subdued with a top line de-growth of ~33%.

* We expect Shree to report strong volumes going forward, benefitting from sustained cement demand from rural and semi-urban sectors in its key operating markets in Northern and Eastern regions along with pick up in infrastructure activities with Government’s continued thrust on infrastructure investment. However, near term uncertainty remains. We expect an uptick in Shree sales volume by ~12% to ~29.5 mn tn and ~33.1 mn tn in FY22E and FY23E respectively. Currently cement prices have softened owing to the monsoon impact. However, once the monsoon recedes, it is expected to remain elevated in order to maintain profitability given the rise in pet coke/coal prices, freight and packaging costs.

* Muted prices in East due to intense competition and supply glut can act as a deterrent for the Company with its expansion plans concentrated in the Eastern Region. Going forward from FY22, a disciplined pricing policy in East is imperative to maintain current EBITDA levels, in the wake of rising key input costs.

EBITDA moderated with elevation in costs

* During Q1FY22, the Company reported a mere ~4.3% y-o-y increase in blended EBITDA/tn at ~Rs 1,482/tn on account of higher other expenses which increased by ~14% to ~Rs 802/tn. Power & fuel cost per ton and freight cost per ton increased y-o-y by ~21% to ~Rs 953.8/tn and ~7% to ~Rs 1,216.7/tn respectively as a result of sharp increase in pet coke and diesel prices. This was partially offset by savings in cost of goods sold and employee cost. Raw material cost per ton fell by ~14% to ~Rs 279.7/tn on account of higher inventory. As a result of unabated increase in costs, Cost/tn increased y-o-y by ~7.6% to ~Rs 3,561/tn. However, in absolute terms, EBITDA grew by ~44.7% y-o-y to ~Rs 10.14 bn.

* Further, higher other income and lower interest and depreciation cost resulted in ~78.5% yo-y growth of PAT to ~Rs 6.6 bn.

* Going forward, cost pressure is likely to continue with increase in pet coke and diesel prices along with resurfacing of fixed costs. Also, with increasing exposure to Eastern markets, margin is likely to get diluted owing to intense competition in the region thus, resulting in muted pricing outlook. As a result, we expect Shree’s EBITDA margin at ~29.7% with EBITDA/tn nearing ~ Rs 1,500/tn by FY23E.

Strong expansion plans in pipeline to drive growth

* Shree is setting up a ~3 mtpa grinding unit in Patas, Pune which is expected to start commercial operations in Q2FY22. Further, Shree has announced a ~4 mtpa clinker unit at Raipur in Chhattisgarh which is expected to be commissioned by Q2FY23.

* Shree aspires to achieve a capacity of ~57 mtpa over 3 years and ~80 mtpa in 6-7 years driven by strong demand visibility. Capacity increase from 40 mtpa to 57 mtpa will primarily be in the North and East regions and from 57 mtpa to 80 mtpa will be in other regions too. Consequently, it has applied for mining approvals at various locations in Rajasthan, Gujarat and Andhra Pradesh

Valuation

With Government’s focus on infrastructure development, Shree is expected to deliver robust performance driven by resilient demand, premiumization coupled with robust distribution network, retail-centric business model and improved market share with new capex underway. We have valued the stock on basis of EV/EBITDA of 20x of FY23E EBITDA method of relative valuation and recommend an ‘Accumulate’ on the stock with a target price of ~Rs 30,670.

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