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EBITDA in-line, volume growth lags peers

Faster volume growth needed to improve ROE and drive upside

* Shree Cement (SRCM)’s 4QFY21 result was in-line, with EBITDA up just 9% YoY – as higher realization was offset by disappointment on cost, leading to weaker EBITDA/t of INR1,433 (-8% YoY). Volume growth at 19% YoY, weighed by lower clinker sales, was also weaker than peers.

* We broadly maintain our FY22/FY23E estimates and expect volumes/EBITDA to post a 12%/15% CAGR over FY21–23E. We maintain Neutral as the valuation (16.8x FY23E EV/EBITDA) prices in earnings growth.

Cost disappointment offset by higher realization

* 4QFY21 rev / EBITDA / adj. PAT was up 22%/9%/31% YoY to INR39.3b/11.8b/7.7b, +5%/+3%/+1% v/s our est.

* Cement volumes grew 22% YoY to 8.08mt, while lower clinker sales (-48% YoY) led to overall volume growth of 19% YoY to 8.22mt (in-line). SRCM lags behind peers in terms of volume growth, with UltraTech/Ambuja/Dalmia delivering 30%/ 24%/ 24% (~30% adj. for trial run vols).

* Blended realization was up 3% YoY (and 4% QoQ) to INR4,785/t, while EBITDA/t declined 8% YoY (and 6% QoQ) to INR1,433/t on the back of higher-than-expected cost of INR3,352/t (+8%YoY/ +8%QoQ).

* Depreciation fell 31% YoY to INR3.0b (on lower capitalization in the past 18M), driving 31% YoY growth in PAT to INR7.7b (in line with our est).

* FY21 rev/EBITDA/PAT was up 6%/8%/47% YoY to INR125.9b/INR39.5b/INR23.1b. OCF/Capex/FCF stood at INR40.9b/INR10.0b/INR31.0b (v/s INR37.5b/INR12.9b/INR24.6b in FY20).

* (Shree also announced dividend of INR60/share (lower than INR110/sh in FY20, including a special dividend of INR40/sh).

Valuation and view

* The management had raised equity (QIP) at end-CY19 to double capacity to 80mtpa by FY27. However, the execution has been slower than anticipated, with only one expansion (of 4mpta in East) having been announced to date. Coupled with low dividends (only 11% payout), we expect this to result in an increase in cash piles to INR134b in FY23 (from INR85b in FY21) – which would keep RoE subdued, in our view.

* While the outlook for the Cement market in North India remains strong, SRCM’s increasing exposure to East (with new capacities) would likely keep margins in check – due to the muted pricing outlook in this region. East is likely to witness ~25% capacity expansion by various players over the next two years, likely to result in a fight for market share.

* We value SRCM at 16x FY23E EV/EBITDA and add the value of its UAE operations (USD70/t) to arrive at TP of INR27,275. We expect EBITDA to grow at a 15% CAGR over FY21–23E, in line with other large-cap peers, on a 12% CAGR for cement sales volumes. We assign a Neutral rating to the stock as it trades at 16.8x FY23E EV/EBITDA, limiting any upside.

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