Hold Shree Cement Ltd For Target Rs.25,000 - Emkay Global
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Focus on branding and cost optimization
* Shree Cement’s (Shree) key focus over the next few years is likely to be on: 1) lowering pricing gap with peers through branding, marketing initiatives, and increasing share of premium products; 2) cost-optimization initiatives to maintain its cost-leadership position; 3) higher-than-industry volume growth to gain market share and better operating leverage.
* Management intends to focus on building brands to narrow down the pricing gap (Rs20- 25/bag) with peers by creating separate teams for sales and marketing functions, formation of technical services team, digitization initiatives including mobile app, increasing share of premium products to 15% of trade sales (vs. 7-8% currently) in the next 3-4 quarters, and higher A&P spends.
* Shree is also likely to maintain its cost-leadership position with an increasing share of rail mix and lowering lead distance, rising share of green power, higher usage of AFR, and better operating leverage. We estimate a sustainable cost-savings potential of Rs60-80/ton over the next few years.
* Management targets volume growth at 1.2-1.3x the industry’s over the next few years (6- 8% CAGR for the industry), led by capacity additions. Management has reiterated its capacity guidance of 80mt by FY30 (8% CAGR) and thus become a pan-India player.
* We maintain our positive stance on the company; however, given only a modest upside on the TP, we maintain our HOLD rating with TP of Rs25,000, based on 15x FY25E EV/E.
* Targets narrowing the pricing gap with peers: Shree’s average price stands Rs20-25/bag, lower than peers. Accordingly, to improve branding and bridging this gap, the company has taken various initiatives, such as: i) creating separate teams for the sales and marketing functions; ii) formation of technical services teams for increasing sales, via close interaction with end-users; iii) digitization initiatives such as mapping of influencers with network through mobile applications; iv) pushing up premium-product sales (higher by Rs20-25/bag) to increase its overall share, from 7-8% of trade sales to 15% in the next 3-4 quarters; v) focus on pushing direct sales; and vi) higher A&P spends (~3% of sales in FY22), supported by a strong balance sheet.
* Focus on cost optimization for maintaining leadership position: Shree has always been a cost leader (opex/ton was 10-15% lower than the industry’s), given its various proactive measures to improve efficiencies. To maintain its leadership position, the company is working on: i) logistics cost optimization by setting up railway sidings at new project sites as well as at existing locations (e.g. Panipat, Kodla, and Baloda Bazar) for increasing the cheaper mode of rail share (12% in Q3) to 25-30% over the next 2-3 years. Additionally, commissioning of new projects will help to reduce lead distance (~450km in Q3) over coming years; ii) increasing its green power share to 55-60% (53% in Q3) in the next two years, through new renewable capacity additions; iii) enhancing AFR usage to 15% by FY24 (average cost of Rs1.2-1.3/Kcal vs. Rs2-2.5/Kcal for other fuels); and iv) better operating leverage led by higher-than-industry volume growth. Accordingly, we estimate sustainable cost-savings potential of Rs60-80/ton over the next few years.
* Aims for volume growth at 1.2-1.3x the industry’s, over the next few years: Management expects industry demand to report a 6-8% CAGR, while Shree’s volumes are likely to grow at 1.2- 1.3x the industry’s (~1.5x growth in the past decade) over the next few years, owing to strong volume push and capacity additions. The company has current capacity of 46.4mt and capacity under construction of 9.5mt; thus, its capacity should increase to 56mt by Q2FY25. Management has reiterated its capacity guidance of 80mt (8% CAGR), which likely includes greenfield capacity additions at Rajasthan (Jaisalmer) and Gujarat as well as brownfield potential at Nawalgarh, Raipur, Guntur, and Karnataka.
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