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Unabated cost increase hurts profitability

EBITDA miss of 5%; MTM loss and higher depreciation impacts profit

* SRCM’s 1QFY23 earnings were below our estimate as the benefits of higher realization (6% above our estimate) was offset by higher costs (8% above our estimate). EBITDA stood at INR8.2b (est. INR8.6b) and EBITDA/t came in at INR1,091 (est. INR1,139).

* Other income posted a loss of INR216m due to a MTM loss of INR961m on investments. Profit stood at INR3.2b (est. INR4.9b).

* We maintain our FY23/FY24 EBITDA estimate, but reduce our EPS estimate by 13%/2% on lower other income and higher depreciation expense. The valuation appears rich at 21x/17x FY23/FY24 EV/EBITDA. Hence, we maintain our Neutral rating on the stock.

Sharp cost increase led to a 26% YoY decline in EBITDA/t

* Standalone revenue/EBITDA/PAT stood at INR42b/INR8.2b/INR3.2b (+22%/- 19%/-52% YoY and +4%/-5%/-36% v/s our estimate). Blended realization rose 11% YoY and 10% QoQ to INR5,602. Sales volume grew 10% YoY to 7.5mt (1% below our estimate). Its Cement capacity utilization stood at 66% in 1QFY23 v/s 63%/69% in 1QFY22/4QFY22.

* OPEX/t rose 27% YoY and 14% QoQ, led by higher variable cost/other expenses. Variable cost/t grew 84% YoY and 23% QoQ, impacted by higher coal/petcoke prices. Other expense/t increases by 7% YoY and 10% QoQ. Absolute employee expense grew 3% YoY and 11% QoQ.

* Higher OPEX led to a 19% YoY decline in EBITDA, while OPM contracted by 10pp YoY to 19.5% (est. 21.5%). EBITDA/t fell 26% YoY and 4% QoQ to INR1,091 (at a 13-quarter low)

* Depreciation/interest cost increased by 41%/7% YoY and 9%/7% QoQ (18%/11% above our estimate). Profit declined by 52% YoY.

* Calculated operating loss for its subsidiary stood at INR180m v/s an EBITDA of INR95m/INR82m in 1QFY21/4QFY22.

Cost benefits over peers should reduce; maintain Neutral

* SRCM’s expansion plans include: a) integrated plant in Nawalgarh (Rajasthan), with a Clinker/Cement capacity of 3.8mtpa/3.5mtpa, and in Guntur (Andhra Pradesh), with a Clinker/Cement capacity of 1.5mtpa/3mtpa; and 2) a grinding unit of 3mtpa in Purulia (West Bengal). We have estimated a capex of INR28b/INR30b in FY23/FY24.

* 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 estimate of ~8%.

* The stock trades at 21x/17x FY23E/FY24E EV/EBITDA (v/s its 10-year average one-year forward EV/EBITDA of 17.6x). We value the stock 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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