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Higher opex impairs profitability, but cost inflation easing

Blended realization up 7% QoQ on higher power and trading revenues

Shree Cement (SRCM)’s 3QFY22 result was in line with our estimates, though, profitability was impacted by higher operating costs. Blended realization improved 17% YoY/7% QoQ led by: a) higher power sales and b) increased trading revenues (one coal shipment was transferred to the UAE plant). The management indicated that cement realization was up 4% YoY/2% QoQ.

Higher opex (up 25% YoY/7% QoQ, excluding purchase of traded goods) led to 24% YoY dip in EBITDA, 9.7% YoY contraction in OPM and 17% YoY drop in EBITDA/t. The management indicated that cost prices have started to soften and 4Q energy cost should be lower than 3QFY22.

The company has started commercial production at its 3mtpa grinding unit in Patas, Pune from 1st Feb’22.

We broadly maintain our FY22-24E EPS. The stock trades at 19.5x/16.4x FY23E/24E EV/EBITDA (v/s 7-year average 1-year forward EV/EBITDA of 20x), which leaves little room for any disappointment. Maintain Neutral

In-line result, EBITDA/t at INR1,260

Revenue/EBITDA/ PAT stood at INR35.5b/INR8.3b/INR4.9b (+7%/-24%/-21% YoY and +6%/-2%/-1% v/s our estimate), respectively. Blended realization was 6% above our estimates, primarily driven by higher trading revenues

Sales volume was down 9% YoY to 6.55mt. Higher blended realization led to 7% YoY revenue growth (6% above our estimates).

Opex/t was up 34% YoY/14% QoQ; however; adjusted for higher traded goods Opex/t rose 25% YoY/7% QoQ. Higher fuel costs led to 47% YoY/19% QoQ increase in variable costs. Coal consumption price was at INR10,000/t v/s INR8,600/t in 2QFY22.

Employee expense was up 14% YoY leading to 27% YoY increase in employee cost/t. Other expense shot up 28% YoY on higher packaging cost and travelling expense

Higher opex led to 24% YoY decline in EBITDA; while OPM contracted 9.7pp YoY to 23.2%. EBITDA/t was lower at INR1,260 (v/s INR1,520 in 3QFY21 and INR1,421 in 2QFY22).

Depreciation and interest expense declined 13% and 6% YoY, respectively. Profit was down 21% YoY to INR4.9b

Sales volume/realization rose 6%/11% YoY in 9MFY22, leading to an 18% revenue growth to INR102b. Higher realization helped offset the steep increase in opex/t (up 20% YoY) and EBITDA declined by a mere 1% YoY to INR27.4b. OPM contracted 5.3pp YoY to 26.8%. EBITDA/t stood lower at INR1,389 (v/s INR1,491 in 9MFY21). Adjusted profit was up 12% YoY, supported by: 1) 14% YoY fall in interest expense, 2) 13% YoY decline in depreciation expense, and 3) 20% YoY increase in other income.

Valuation and view

Management indicated that demand has started to improve along with price increases across its operating geographies in Jan-Feb’22. Coal cost inflation seems to be behind us and the management expects energy cost to decline in 4QFY22.

SRCM’s expansion plans include: a) an integrated plant with clinker/cement manufacturing capacity of 3.8mtpa/3.5mtpa in Nawalgarh, Rajasthan, 2) a grinding capacity of 3mtpa in Purulia, West Bengal and 3) a clinker plant of 12,000 tpd (3.96mtpa) in Baloda Bazar, Chhattisgarh. It completed commissioning of a 3mtpa grinding unit in Patas, Pune during 4QFY22. Capex in FY22/23 is expected to be INR17b/INR23b.

We expect SRCM to maintain its premium valuation due to a strong balance sheet (net cash expected to increase to INR99b in FY24E v/s INR64.5b in FY21) and effective execution of its expansion projects. The stock trades at 19.5x/16.4x FY23E/24E EV/EBITDA (v/s 7-year average 1-year forward EV/EBITDA of 20x), which leaves little room for any disappointment. We value SRCM at 18x FY24E EV/EBITDA to arrive at our TP of INR27,730. We maintain our Neutral rating on the stock with an upside potential of 12%.

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