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Beats estimates on lower cost and higher power revenue

Raise EPS estimates on lower depreciation and higher other income

* SRCM’s 2QFY22 result beat our estimate on account of: a) higher Power sales, which offset the impact of weaker Cement realization and 4% miss on volumes, and b) lower freight costs. Blended EBITDA/t declined by 4% QoQ to INR1,421/t v/s our estimate of INR1,236/t.

* We broadly maintain our FY22E/FY23E/FY24E EBITDA estimate, but raise our EPS estimate by 15%/1%/11% to factor in higher other income and lower depreciation cost (in line with its 1HFY22 run-rate). We maintain our Neutral rating as the valuation (21.9x FY23E EV/EBITDA) prices in earnings growth.

Miss on volumes offset by better realization on higher power sales

* Revenue/EBITDA/adjusted PAT stood at INR32.1b/INR9b/INR5.8b (+6%/- 9%/+6% YoY; -1%/+10%/+17% v/s our estimate) in 2QFY22. Sales volume missed our estimate by 4% and declined by 3% YoY to 6.32mt (-8% QoQ).

* Miss on volume was offset by higher blended realization, which rose 1% QoQ and 10% YoY to INR5,073/t (est. INR4,888/t). Gray Cement realization dropped by ~2% QoQ, but higher Power sales aided blended realization.

* Cost/t came in line at INR3,651/t (up 17% YoY and 3% QoQ) as a rise in other expenses was offset by: 1) lower fuel cost (INR994/t v/s our estimate of INR1,030/t), and 2) lower freight cost (INR1,118/t v/s our estimate of INR1,229/t), led by lower lead distance (458km v/s 472km in 1QFY22) and lower freight rates.

* EBITDA/t beat our estimate by 15% and stood at INR1,421/t (down 6% YoY and 4% QoQ).

* Depreciation fell 10% YoY (on lower capitalization in the past 18 months), while other income rose 46%. Profit was up 6% YoY at INR5.8b (est. INR5b).

* Revenue/EBITDA/adjusted PAT was up 24%/13%/35% YoY in 1HFY22 at INR66.6b/INR19.1b/INR12.4b, led by 15% YoY growth in volumes to 13.16mt.

* OCF/capex/FCF stood at INR9.9b/INR7.6b/INR2.3b in 1HFY22 v/s INR20.3b/INR3.3b/INR17.1b in 1HFY21.

Valuation and view

* We expect SRCM to maintain its premium valuations based on: a) 8% EBITDA CAGR over FY21-24E on a strong base of FY20-21; b) strong Balance Sheet – net cash expected to increase to INR110b in FY24E v/s INR64.5b in FY21; c) stable return ratios (the company enjoys one of the best return ratios in the Cement sector, with a RoIC of 39.2% in FY21) and; d) execution of its expansion projects.

* SRCM trades at 21.9x/18.4x FY23E/FY24E EV/EBITDA. The stock has traded at an average EV/EBITDA of 20x for the last seven years. We value SRCM at 19x Sep’23E EV/EBITDA to arrive at our TP of INR28,220 and maintain our Neutral rating on the stock.

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