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Input cost pressure hurts margin

Shree Cement (SRCM) reported a weak quarter on the profitability front (on expected lines) as input cost pressures impacted EBITDA margin. Net sales came in at INR 37.8bn (+18% YoY and down 10% QoQ) led by volume (+18% YoY) as realisation was flat YoY. EBITDA was INR 5.2bn (down 42% YoY; down 36% QoQ) and EBITDA / tonne contracted to INR 702 / tonne (down 51% YoY; down 36% QoQ). Total operating costs surged to INR 4,369 / tonne (+INR 716 / tonne YoY; flat QoQ) largely on account of higher power and fuel cost (+INR 1,082 / tonne YoY) while realisation remained flat on a YoY basis. By FY25, SRCM plans to add another 10MTPA capacity at an investment of INR 60-65bn, funded through internal accruals. SRCM also continues to enjoy cost leadership and 2HFY23 is likely to see a substantial improvement as petcoke prices have corrected over 2QFY23. We have a ‘BUY’ Rating on the stock, ascribing a 16x 1yr fwd EV / EBITDA (in line with UltraTech) and arriving at a Sep’23 TP of INR 24,135 (implying 14% upside) with a possible upside risk with respect to acquisitions.

* Healthy volume growth drives revenue: In 2QFY23, net sales came in at INR 37.8bn (+18% YoY and down 10% QoQ) while volume was 7.5MT (7.2MT of cement + 0.3MT of clinker; +18% YoY; down 1% QoQ) and blended realisation was INR 5,071 (flat YoY; down 9% QoQ). For 1HFY23 volume / revenue / realisation have grown 14% / 20% / 5% YoY while EBITDA / EBITDA per tonne have declined 30% / 38% YoY.

* Peak inflation impacting margin: Total operating costs surged by INR 4,369 / tonne (+20% YoY; down 3% QoQ) due to higher raw material cost (INR 496 / tonne in 2QFY23; +110% QoQ; +50% YoY), and power and fuel cost: INR 1,646 / tonne (+192% YoY; +6% QoQ), only partially offset by increase in realisation (INR 5,071; flat YoY and down 9% QoQ). EBITDA was INR 5.2bn (down 42% YoY; down 36% QoQ) and EBITDA / tonne contracted to INR 702 / tonne (down 51% YoY; down 36% QoQ). There was a sharp decline in other expenses: INR 799 / tonne (down 40% YoY; down 35% QoQ).

* c.10MTPA organic expansion; to get completed over the next 3 years: SRCM currently has 46.4MTPA of grinding capacity and plans to add another 10MTPA through organic growth. It recently announced grinding unit expansion in the South (Andhra Pradesh – 3MTPA) and the East (West Bengal - 3MTPA), and an integrated capacity expansion project in the North (Rajasthan 3.5MTPA).

* Management changes: SRCM also made key management changes as Mr Benu Gopal Bangur resigned as Director and Chairman and has been appointed as "Chairman Emeritus”. Mr H M Bangur has been appointed Chairman (earlier MD). Mr Prashant Bangur has been appointed as Vice Chairman (earlier Joint MD) and Mr Neeraj Akhoury has been designated as MD (earlier MD & CEO at ACC and then Ambuja).

* Maintain BUY with a Sep’23 TP of 24,135: We maintain a ‘BUY’ rating on SRCM and ascribe a 16x 1yr fwd EV / EBITDA to arrive at a Sep’23 TP of INR 24,135 (implying 14% upside) with a possible upside risk with respect to acquisitions.

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