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EBITDA in-line; lags peers in volume growth

Faster volume growth needed to improve ROE and drive upside

* Shree Cement (SRCM)’s 1QFY22 result was in-line, with EBITDA up 45% YoY – as higher realization was offset by disappointment on cost, leading to weaker EBITDA/t of INR1,482 (v/s our est. of INR1,552/t). Volume growth at 39% YoY, weighed by lower clinker sales, was also weaker v/s peers.

* We broadly maintain our FY22E/FY23E estimates and expect a 13%/13% volume/EBITDA CAGR over FY21–23E. We maintain Neutral as the valuation (18x FY23E EV/EBITDA) prices in earnings growth.

Cost disappointment offset by higher realization

* 1QFY22 rev / EBITDA / adj. PAT was up 48%/45%/78% YoY to INR34.5b/10.1b/6.6b (+1%/-4%/+7% v/s our estimate).

* Cement volumes grew 41% YoY to 6.79mt, while lower clinker sales (-62% YoY) led to overall volume growth of 39% YoY to 6.84mt (in-line). SRCM lags behind peers in terms of volume growth, with UltraTech/Ambuja/ACC delivering 47%/53%/44%.

* Blended realization was up 7% YoY (and 5% QoQ) to INR5,043/t (v/s our est. of INR4,985/t). On the other hand, EBITDA/t missed our est. by 5% and came in at INR1,482/t (+4% YoY / +3% QoQ) on the back of higher-than-expected cost of INR3,561/t (+8%YoY / +6%QoQ).

* Depreciation fell 14% YoY to INR2.3b (on lower capitalization in the past 18M), driving 78% YoY growth in PAT to INR6.6b (v/s our est. of INR6.2b).

Valuation and view

* The management had raised equity (QIP) at end-CY19 to double capacity to 80mtpa by FY27E. However, the execution has been slower than anticipated, with only one expansion (of 4mpta in East) having been announced to date. Coupled with low dividends (only an 11% payout), we expect this to result in an increase in cash piles to INR126b in FY23 (from INR85b in FY21) – which would keep RoE subdued, in our view.

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

* We value SRCM at 16x Sep’23E EV/EBITDA and add the value of its UAE operations (USD70/t) to arrive at TP of INR28,550. We expect a 13% EBITDA CAGR over FY21–23, in line with other large-cap peers, on a 13% CAGR in cement sales volumes. We assign a Neutral rating to the stock as it trades at 18.0x FY23E EV/EBITDA, limiting any upside.

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