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Expansions to drive balanced distribution of capacity…

…and will lead to volume growth

* Shree Cement (SRCM) is the third largest cement player with an installed cement capacity of 46.4mtpa as of FY22. In this note, we analyze SRCM’s FY22 Annual Report (AR). The key highlights of our analysis are as follows: a) SRCM commissioned 3mtpa grinding unit (GU) at Pune, Maharashtra in Feb’22 and 4mtpa (12,000tpd) clinker plant at Baloda Bazar, Chhattisgarh in Mar’22, b) it aims to reach to 80mtpa cement capacity by FY30 (announced roadmap to achieve 56mtpa capacities to date) and c) it continued investments in renewable energy (RE) to enhance green energy share.

* The management highlighted that on a lower base the industry production is estimated at 345-350mt in FY22, ~6% higher than pre-Covid levels. Going forward, the demand conditions are likely to be strong underpinned by infra projects, affordable housing and rising rural income.

Announces capacity expansion in the North, East and South regions

* SRCM has commissioned Greenfield GU of 3mtpa in Maharashtra (West) and 4mtpa Clinkerization unit at Chhattisgarh (East) in FY22. With these expansions, SRCM’s domestic clinker/cement capacity increased 15%/ 7% to 29.6mtpa/46.4mtpa, respectively, as of Mar’22.

* Further, the company has announced clinker/cement capacity expansion of 5.3mtpa/9.5mtpa spread over North, East and South regions. Postcompletion of these expansions (by FY25E), SRCM’s clinker/cement capacity will rise 18%/20% to 34.9mtpa/55.9mtpa, respectively.

* SRCM aims to reach a cement capacity of 80mtpa by FY30. We believe that the next leg of expansions could be in North (Rajasthan, Haryana and Punjab), West (Gujarat) and Central (Uttar Pradesh) regions.

Profitability hurts due to cost pressures

* In FY22, SRCM’s standalone EBITDA declined 8% YoY to INR36.5b primarily due to input cost pressure. Sales volume increased 3% YoY to 27.74mt. However, capacity utilization of cement dropped 3.1pp YoY to 63.7%.

* The sale of premium products rose 6% YoY in FY22 and contributed 6.1% to the overall sales volume. Cement realization improved 5.6% YoY to INR4,915/t in FY22 (cement realization excluding other operating income was up 4% YoY to INR4,764/t).

* Operating cost (adjusted for purchase of traded goods) grew 16% YoY to INR3,749/t due to higher RM costs, fuel prices (coal, petcoke and diesel), store and spares, packing material and other fixed overheads (ad spends, repairs and maintenance). Management continues to focus on cost optimization through reduction in clinker factor, power consumption, increase in green energy share, routes rationalization, augmenting use of technological tools in supply management and building rail connectivity.

Cash conversion days increase due to higher fuel inventories

* SRCM’s cash conversion cycle increased (50 days in FY22 v/s 34 days in FY21), mainly due to higher fuel (witnessed sharp increase in fuel prices) and work-inprogress (clinker) inventories.

* SRCM had been generating strong cash flows and the cumulative OCF stood at INR106b during FY20-22 (v/s INR61b over FY17-19). FCF stood at INR63b during FY20-22 (v/s INR4b during FY17-19).

* SRCM remains a net cash company and it has a net cash balance of INR67b in FY22 (v/s INR64b in FY21). We believe that it will continue to maintain strong liquidity position and a deleveraged balance sheet with focus on utilizing operating cash flows for its future growth plans. We forecast its net cash to be at INR67b in FY24.

* SRCM is a regular dividend paying company. Dividend payout as a % of net profits stood at 14% in FY22 v/s 9% in FY21 (last five-year average was 21%).

Expensive valuations cap material upside; maintain Neutral

* SRCM has been trading at premium valuations due to cost leadership achieved through: 1) higher share of green power (WHRS and solar power) that helps to fulfill 48% of energy requirements; 2) higher dependence on split grinding units and alternative raw materials: alternative sources of gypsum met over 85% of its requirements in FY22 (out of which 24% was from in-house manufacturing); and 3) higher clinker-to-cement conversion ratio. The company raised its synthetic gypsum manufacturing capacity by 100TPH in FY22 (previous capacity: 70TPH). It is also in the process of setting up solar power capacity of 106MW by 2QFY23E.

* We believe that its cost benefits over industry peers will reduce gradually as other companies are increasing their green power capacities over the next few years and the industry is also increasing the mix of split grinding units. SRCM’s cement sales volume growth of 4.7% YoY in FY22 was lower than industry volume growth estimates of ~8%. Going forward, we expect SRCM’s volume to grow 8%/9% YoY in FY23/24, respectively.

* SRCM trades at 20.3x/16.3x FY23/24E EV/EBITDA and EV/t of USD168/USD151 in FY23/24E, respectively. The stock has traded at an average 1-year forward EV/EBITDA of 17.9x in the last 10 years. We value it at 16x FY24E EV/EBITDA to arrive at our TP of INR20,000 and maintain our Neutral rating on the stock.

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