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* Shree Cement (SRCM) is one of the most cost-efficient producers in the industry, owing to its various cost reduction measures such as higher use of green energy, in-house innovation to improve plant efficiency, and a freight cost policy that involves auction for better rates.

* However, while other players have also caught up on cost-reduction measures, the cost/t gap between SRCM and its peers has declined to INR572/t in FY22 (INR529/t in 9MFY23) from INR838/t in FY18. We believe the company’s cost curve currently positions the company above its peers, leaving little room for significant cost reduction.

* SRCM is expanding its clinker/cement capacity by 5.3mtpa/9.5mtpa spread over North, East, and South regions. SRCM is estimated to deploy ~90% of OCF for Capex in FY23-25 as compared to the past three/five-year average at ~40%/~60%, which will result in lower FCF yield.

* The stock trades at 19.7x/16.9x FY24E/FY25E EV/EBITDA (v/s its 10-year average one-year forward EV/EBITDA of 19.4x), limiting any material upside potential. We reiterate our Neutral rating and value SRCM at 16x FY25E EV/EBITDA (earlier 16x Sep’24) to arrive at our TP of INR23,710 (earlier 22,960).

Cost curve is continuing to flatten

* The gap in cost efficiency is narrowing with peers catching up with costreduction measures. However, SRCM has limited opportunities for cost reduction due to several reasons. 1) All of its kilns are equipped with WHRS, leaving limited scope for further additions. This has resulted in SRCM’s green power share at 53%, much higher than the peer in the range of 4-43%; 2) During the peak construction period (i.e. 4Q), SRCM’s grinding capacity utilization is lower than UTCEM’s; as a result, SRCM is unable to benefit from operating leverage; and 3) petcoke prices are currently elevated compared to historical levels, putting further pressure on SRCM’s cost reduction measures.

* SRCM’s peers are investing in green energy (mainly WHRS), helping them reduce their overall cost; on the other hand, SRCM’s other cost reduction measures are broadly in line with peers’ actions. The company is setting up solar power plants to increase its green energy share from its current 53% (~48% in FY22) to more than 55% in the next two years. The incremental saving in power cost v/s peers will be limited. It is setting up railway siding for most of the plants to optimize logistics cost. It is also focusing on increasing thermal substitution rate (3.91% in 3QFY23 v/s 2.41% in FY22)

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