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Delivering well on volume growth

RoE to decline on slower capacity growth and cash pile-up

* Shree Cement (SRCM) reported a strong 3QFY21 result, with EBITDA growing 28% YoY to INR10.9b, led by above-industry volume growth of 15% YoY.

* While we expect volume growth over the next two years to track the industry at a 10% CAGR, we expect stock underperformance to continue as new capacity additions are slower than anticipated, diluting ROE.

* We lower our FY21/FY22 EBITDA estimate by 1%/3% and TP by 2% to INR24,300, factoring in higher costs. We maintain Neutral as the current valuation (16x FY22E EV/EBITDA) prices in earnings growth.

EBITDA up 28% YoY, led by strong volume and lower costs

* 3QFY21 revenue/EBITDA/PAT grew 16%/28%/102% YoY to INR33.1b/INR10.9b/INR6.3b and was +1%/+3%/-2% v/s our estimate.

* While cement volumes grew 18% YoY to 7.03mt, lower clinker sales (-51% YoY) led to total volume growth of 15% YoY to 7.16mt (in-line).

* While blended realization was up 1.3% YoY (and flat QoQ), freight-adjusted realization declined 1.4% YoY (and 1.7% QoQ) – indicating higher volume growth was driven by efforts to cater to faraway markets (likely in Central India). Freight cost/t rose 5% QoQ to INR1,137 despite diesel prices coming in 2% QoQ lower.

* Blended EBITDA/t rose 12% YoY to INR1,520/t (flat QoQ), led by decline in unitary cost to INR3,099/t (-3% YoY, -1% QoQ). This was attributable to better absorption of fixed costs, such as employee and other expenses (due to higher volumes).

* Depreciation fell 33% YoY to INR2.9b due to low capitalization in the past year, driving 102% YoY growth in PAT.

* 9MFY21 revenue/EBITDA/PAT was at INR86.6b/INR27.8b/INR15.4b (+0%/+7%/+57% YoY). Volume grew 3% YoY to 18.63mt and EBITDA/t was up 4% YoY to INR1,491/t, driven by 7% YoY decline in unitary cost.

Valuation and view

* While the management has guided to double capacity to 80mtpa by FY27, execution has been slower than anticipated, with only one expansion (of 4mpta) having been announced in East. Therefore, we expect the cash pile to grow further, diluting RoE by 200bps to 15% over FY21–23E.

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

* We value SRCM at 16x Sep’22E EV/EBITDA and add the value of the UAE operations (USD70/t) to arrive at TP of INR24,300. We expect EBITDA to grow at a 10% CAGR over FY20–23E, lower than large-cap peers, due to a weak outlook for the Power business. We therefore assign a Neutral rating to the stock, which trades at 16x FY22E EV/EBITDA, in line with its past fiveyear average.

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