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Maintains industry leading efficiency…

The key positive trend during the quarter was Shree Cement (SCL) reporting industry leading margins at ~30% (vs. I-direct estimate: 28.5%) despite a rise in cost of production (up 8% YoY) on account of higher freight and other costs and rise in employee costs due to increments. EBITDA grew 9.1% YoY (8.1% QoQ) to | 1177.2 crore, led by improved sales volume (up 19% YoY to 8.22 MT) and better realisations. Further, the company managed to keep production cost at | 3,350/t, lowest in the Industry. SCL aims to double its capacity every seven years. The current cement capacity is at 44.4 MT (including UAE), which will increase to 50.4 MT with the commissioning of 6 MT cement capacity at Odisha and Maharashtra. It is also adding 3.5-4 MT clinker capacity with capex of ~| 1000 crore at Raipur (likely by September 2022E). With a pick-up in infra, real estate and likely better monsoon, we expect the growth momentum to be strong and expect revenue and PAT CAGR of 16.6% and 16.4%, respectively, in FY21-23E.

Stronghold in high growth markets of North, east region…

SCL is one of the strongest players in the Northern region with operating units at Rajasthan, Haryana, Uttar Pradesh and Uttarakhand. Apart from stronghold in North, which accounts for ~66% of revenues, the company also has increased its share in east and south markets with operating units at Chhattisgarh, Jharkhand and Bihar as well as operating unit in Karnataka. The share of eastern region increased from 21% in FY17 to 25% as of FY20. The company’s strategy to adopt split grinding units close to user markets has also provided efficiency in terms of logistics cost.

Operating efficiency remains best in industry

Being a pioneer in many cost initiatives, SCL enjoys strong operating efficiency, which makes it one of the low cost producers in India. The strong efficiency arises on account of 1) 85% consumption of power from captive power plants including usage of WHRS, 2) higher sale of blended cement, 3) use of split-grinding units and 4) adequate limestone reserves.

Credible record of low leverage, healthy return ratios

Tracking the data since FY07, SCL has always reported double-digit RoE; thus speaking strongly of the management’s efficient capital allocation. These healthy returns have been generated with net Debt/EBITDA remaining below 1x throughout this period. We believe the same is going to be maintained despite new capex announcement involving capex of | 1000 crore with an aim of doubling the capacity in seven years.

Valuation & Outlook

We expect the company to continue its leadership on costs that would, in turn, help it to consistently gain the market share with improved profitability and return matrix. Thus, it remains a long term structural play. Hence, we maintain our BUY rating on the company with an unchanged TP of | 31,000/share (i.e. 20.5x FY23E EV/EBITDA).

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