Buy Shree Cement Ltd For Target Rs.30,000 by Axis Securities
EBITDA Beat Led By Lower Costs
Est. Vs. Actual for Q3FY25: Revenue – MISS ; EBITDA Margin – BEAT; PAT – BEAT
Change in Estimates post Q3FY25 (Abs.)
FY25E/FY26E: Revenue: -5%/-4%; EBITDA: 3%/2%; PAT: -2%/-11%
Recommendation Rationale
* Capacity expansion progressing well: The capacity expansion program announced by the company is progressing as per schedule. These strategic moves are expected to help Shree Cement catch up with larger peers and strengthen its market presence. We estimate the company to achieve a volume growth CAGR of 11% over FY25E-FY27E.
* Lower cost drives EBITDA margin: During the quarter, the overall cost of cement production declined sharply by 9% QoQ/YoY to Rs 3,750/tonne, marking the lowest level in the last 12 quarters and reaffirming the company's cost leadership compared to larger peers in the industry. We anticipate an EBITDA margin improvement of 200 bps over FY25- FY27, reaching 23.5%.
* Robust Cement Demand & Consolidation to benefit large players: We expect cement demand to remain robust, with the industry projected to grow at a CAGR of 6%-8% over FY24-FY27, driven by infrastructure and housing spending, along with strong real estate demand. Further consolidation in the industry is expected to benefit large players such as Shree Cement, providing advantages in pricing, supply chain efficiency, and incremental demand over the long term.
Sector Outlook: Positive
Company Outlook & Guidance:
The company expects cement demand to grow, driven by an anticipated increase in rural consumption supported by improved farm cash flows, sustained healthy demand for urban housing, and a likely rise in government infrastructure spending. This outlook bodes well for the cement industry going forward.
Current Valuation: 18x FY27EV/EBITDA (Earlier Valuation: 18x FY26 EV/EBITDA)
Current TP: Rs 30,000/share (Earlier TP: Rs 25,560/share)
Recommendation: We change our recommendation from HOLD to BUY and roll over our estimates to FY27.
Alternative BUY Ideas from our Sector Coverage: UltraTech Cement Ltd (TP13,510/share), JK Cements Ltd (TP-5,380/share), Dalmia Bharat (TP-2,000/share), ACC Ltd (TP-2,380/share), Ambuja Cements Ltd( TP: Rs 655/share)
Financial Performance
SCL reported a mixed set of numbers for the quarter. While volume and revenue declined by 1% and 14% YoY (below expectations), EBITDA and PAT declined by 23% and 69% YoY (above expectations). On a QoQ basis, volume, revenue, EBITDA, and PAT grew by 15%, 14%, 60%, and 146%, respectively, driven by better cement realisations and lower costs. The company reported a profit of Rs 229 Cr against Rs 93 Cr in Q2FY25.
EBITDA margin stood at 22.3% (vs. expectations of 18.2%) compared to 25.2% YoY, supported by lower costs. The quarter’s volume stood at 8.77 Mn TPA, down 1% YoY. EBITDA/tonne stood at Rs 1,079, down 22% YoY but up 38% QoQ. The company reported a blended realisation/tonne of Rs 4,830, down 12% YoY and 2% QoQ, while cement realisation improved by 3% during the quarter. Cost/tonne declined sharply by 9% YoY/QoQ to Rs 3,750/tonne.
Depreciation costs increased by 116% during the quarter due to the commissioning of a new plant and adopting an accelerated depreciation policy
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