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* Shree Cement (SRCM) reported 1QFY24 EBITDA of INR9.3b vs. our estimate of INR9.6b. EBITDA/t stood at INR1,046 vs. our estimate of INR1,069. OPM declined 80bp YoY to 18.7% (est. 20%). However, adjusted PAT stood at INR5.8b, above our estimate of INR4.2b, led by lower depreciation.

* SRCM has accelerated its growth plans and outlined expansion plans of 12mtpa (capex: INR70b; capex/t of ~INR71), which, along with ongoing plans, will increase its capacity to 72.4mt (consolidated). It plans to achieve a capacity of 80mtpa in the next few years.

* We maintain our FY24/FY25 estimates and continue to believe that SRCM’s cost benefits over peers are narrowing. The stock’s valuation at 19.4x FY24E EV/EBITDA appears rich; hence, we maintain our Neutral rating.

Capacity utilization at 80% in 1Q; cement realization down 2% QoQ

* Revenue/EBITDA/Adj. profit stood at INR50b/INR9.3b/INR5.8b (+19%/+14%/+84% YoY and +4%/-3%/+37% vs. our estimates). Sales volume rose 19% YoY. The company generated additional revenue from the sale of a coal shipment, which drove blended realization higher (up 3% QoQ). But cement realization was down 4% YoY/2% QoQ.

* Average fuel consumption cost stood at INR2.37/Kcal vs. INR2.64/INR2.53 in 1QFY23/4QFY23. Freight costs/other expenses/employee cost per tonne declined 1%/13%/9% YoY. OPM contracted 80bp YoY to 18.7% and EBITDA/t declined 4% YoY to INR1,046.

* Depreciation declined 6% YoY/30% QoQ. Accelerated depreciation was provided in previous quarters due to higher capitalization. Depreciation in FY24 is estimated to be INR20b vs. INR3.1b in 1QFY24, as new capacities will be commissioned in the coming quarters.

Highlights from the management commentary

* Cement demand is expected to remain strong given the government’s focus on infrastructure development, higher spending by the government ahead of general elections and demand from the housing segment. Volume growth should be in double digits in FY24. ? Volume grew in double digits YoY across key markets: ~25% in East, ~20% in South, and ~12% in the North region.

* A grinding unit of 3mtpa was commissioned in Purulia, West Bengal, which helped SRCM expand its presence in all key markets in the East region.

Valuation expensive; maintain Neutral

* SRCM has been trading at premium valuations due to cost leadership, efficient capital deployment, and higher capacity/volume CAGRs than the industry. We continue to believe that SRCM’s cost benefits over its peers are narrowing.

* The stock trades at 19.4x FY24E EV/EBITDA (in line with its 10-year average one-year forward EV/EBITDA of 19.5x), which appears rich. We maintain our Neutral rating and value the stock at 16x FY25E EV/EBITDA to arrive at our TP of INR24,200.

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