IGI Logo

Cost pressures and weak realization hurt

Announces changes in the Board’s composition

* SRCM, as expected, reported a weak 2QFY23, led by higher variable costs and weak realization. EBITDA fell 42% YoY to INR5.2b (est. INR5.4b) and EBITDA/t came in at a 28-quarter low at INR701 (est. INR770), down 51% YoY and 36% QoQ). Profit fell 67% YoY to INR1.9b (est. INR2.1b).

* Changes in the Board composition: 1) Mr. B. G. Bangur will be Chairman Emeritus (earlier: Chairman); 2) Mr. H. M. Bangur will be Chairman (earlier: MD); 3) Mr. Prashant Bangur will be Vice Chairman (earlier: Joint MD); and 4) Mr. Neeraj Akhoury (former MD & CEO of ACEM/ACC) has been designated as MD for a period of five years.

* We have kept our earnings estimates largely intact. Valuations, at 17.7x FY24E EV/EBITDA, appears rich considering the narrowing of cost benefits v/s its peers. We maintain our Neutral rating on the stock, valuing it at 16x Sep’24E EV/EBITDA (from Mar’24 earlier).

Sales volume above our estimate, but realization disappoints

* Revenue/EBITDA/profit stood at INR37.8b/INR5.2b/INR1.9b, +18%/-42%/- 67% YoY and 1%/3%/9% below our estimates. Sales volumes rose 18% YoY as Cement volume grew 14.5%. Realization was flat YoY, but declined by 9% QoQ (7% lower than our estimate). Lower power sales and higher clinker volumes (impact of ~1% on realization) aided pressure on realization.

* OPEX/t increased by 20% YoY, led by: 1) a 66% increase in variable costs on higher coal and petcoke prices, and 2) a 3% rise in freight cost. Employee cost/t fell 12% on higher volumes and other expense declined by 10% YoY. Higher costs led to 14pp YoY and 6pp QoQ decline in OPM to 13.8%.

* Depreciation/interest cost rose 45%/22% YoY. Higher interest cost was largely due to an increase in short-term borrowings (up INR6.9b in 1HFY23).

* Revenue grew 20% YoY in 1HFY23, backed by a 6%/14% YoY rise in blended realization/volume. OPEX/t increased by 23% YoY, which led to 30% drop in EBITDA to INR13.4b and ~12pp YoY decline in OPM to 16.8%. Profit declined by 59% YoY to INR5.1b.

* OCF in 1HFY23 declined by 26% YoY to INR7.3b due to lower profitability, which was partly offset by an improvement in working capital and lower tax outgo. FCF turned negative (INR4.6b) v/s INR2.3b in 1HFY22, due to higher capex of INR12b v/s INR7.6b in 1HFY22.

Expensive valuation, maintain our Neutral rating

* SRCM is expanding its domestic grinding capacity by 9.5mtpa to 55.9mtpa by FY25. Volume growth over FY20-22 has been lower than its peers. Its cost benefits v/s its peers is shrinking as other companies are increasing their green power usage, dependence on split grinding units, etc.

* The stock trades at 17.7x FY24E EV/EBITDA (v/s its 10-year average oneyear forward EV/EBITDA of 18x), which restrict any material upside. We maintain our Neutral rating and value it at 16x Sep’24E EV/EBITDA (v/s Mar’24 earlier) to arrive at our TP of INR21,510.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer