Add Shree Cement ltd For Target Rs. 27,500 By Emkay Global Financial Services Ltd
We downgrade Shree Cement (SRCM) to ADD from Buy and cut TP by ~5% to Rs27,500 from Rs29,000. SRCM reported standalone EBITDA of Rs12.5bn (down ~9% YoY, but up 36% QoQ), in line with our estimate. However, EBITDA/t for India operations was Rs1,125/t vs our estimate of ~Rs1,200 (standalone), implying subdued profitability at its subsidiary (SCEPL). In a clear departure from its lower-than-industry volume growth, SRCM delivered robust ~9% YoY growth and resultantly gained market share. However, cement realizations bore the brunt, growing at a slow rate of 1.6% QoQ (we expected >2%). Similarly, inflation in freight costs (Rs80/t both YoY and QoQ) explains the need to serve long-lead markets, to regain lost market share. Our view: The management guides to now shift focus on chasing market share vis-à-vis ‘value over volume’. We turn slightly cautious on the timing of the strategy, given expectations of a soft demand scenario till 1HFY27 and elevated input-cost levels. We also note the widening profitability gap (~Rs130/t) vs UltraTech Cement (UTCEM) in Q4, despite UTCEM being under ramp-up phase of acquired assets. Hence, we see little merit in valuing SRCM at an equivalent valuation multiple (vs UTCEM) and thereby cut FY28E EV/EBITDA to 17x (18x earlier). We broadly maintain our FY27E/28E EBITDA.
Weak margins; focus shifts to ‘volume over value’
SRCM reported standalone revenue of ~Rs56bn, up 8% YoY/28% QoQ, driven by strong ~9% YoY volume growth. Cement realizations were up 1.6% QoQ, but lower than expectations and peers’ (reported so far). We see continued pressure on realization, in its fresh pursuit of chasing ‘volume over value’. The company guides to achieve volume of ~40mt in FY27, implying 10% YoY growth (vs ~2% in FY26). On the cost front, unit variable costs (standalone operations) grew 9% YoY/6% QoQ as SRCM witnessed cost inflation of i) Rs20-30/t on account of packaging costs, and ii) higher logistics costs owing to longer lead distance. Consequently, EBITDA/t for India operations stood at Rs1,125 vs Rs1,400 in Q4FY25 and Rs1,032 in Q3FY26. Further, SRCM saw improvement in premium sales, at 22% of trade volume in Q4FY26 vs 16% in Q4FY25. PAT stood at Rs5.3bn, down ~4% YoY. Total dividend payout for FY26 stands at Rs150 per share, implying 0.6% yield.
Limited capex program could push net cash above Rs120bn by FY28E
The management provided capex guidance of Rs15bn in FY27. We pencil in capex cash outflow of Rs35bn over FY27-28E, and see cash reserves moving past Rs120bn or ~Rs3,300/sh. We believe this gives SRCM a major advantage over peers for pursuing inorganic expansion, if any. We estimate ~8.5% volume CAGR over FY26-28, and expect SRCM to log EBITDA/t of Rs1,150/Rs1,130/Rs1,225 in FY26/FY27E/FY28E, respectively.
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