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Shree Cement Ltd reported Q2FY25 volumes came in at 7.6mnt, marking a decrease of 7.3% YoY and 21.2% QoQ. The volume is impacted mainly due to extended monsoon and muted infra spends by Govt, resulting in revenues of INR37,270mn, a decline of 18.3% YoY and 22.9% QoQ. The revenue drop was primarily due to lower volume. The EBITDA/t for the quarter was INR780/t, down 26.5% YoY and 18.0% QoQ, largely impacted by lower demand and higher employee expenses. The PAT for the quarter was INR931mn, a decrease of 81.1% YoY and 70.7% QoQ. EPS for Q2FY25 were INR25.8. Sale of premium products stood at 15% of total trade sale volume vs 9% in 1QFY25.

* Expansion plans on track: Shree Cement Ltd. is actively doing a capacity expansion to reach a goal of 80mnt by the end of FY28E. The management has indicated plans to invest INR40,000mn over the next four years. The company's current expansion projects, including Jaitaran, Rajasthan (6.0 MTPA), Kodla, Karnataka (3.0 MTPA), Baloda Bazar, Chhattisgarh (3.4 MTPA), and Etah, Uttar Pradesh (3.0 MTPA), are progressing well and are expected to be commissioned by the Q1FY26E. Shree Cement is also focused on further capacity additions across various regions to meet its targets ahead of schedule, aiming for a capacity of 62mnt by March 2025E, 65mnt by September 2025E, and 75mnt by March 2027E.

* Total Cost/t came to INR4,124/t: During the quarter, total cost per tonne decreased by 8.3% YoY, primarily due to reductions in power and fuel costs as well as COGS expenses. Power and fuel costs per tonne for the quarter were INR1,317/t, down 21.2% YoY and 9.6% QoQ, driven by higher usage of green power i.e. 54.8% highest in the Industry. The company’s average CV fuel cost dropped from $2.05 to $1.71 YoY, with management expecting further declines in power and fuel costs. Work is ongoing to add 90 megawatts of green power capacity, with completion targeted by March 2025. COGS per tonne for the quarter was INR539/t, a 19.5% YoY decrease but a 1.8% increase QoQ. Freight expenses per tonne were INR1,173/t, showing a slight increase YoY and QoQ. The lead distance was 453 km, down from 475 km last year, and management does not anticipate further reductions in lead distance.

* Focus on premium product lead to lower decline in realization: The company has adopted a "value over volume" approach, emphasizing high-end, high-value products to strengthen its market position. Despite sequential declines in industry cement prices, the company effectively minimized the impact through disciplined pricing and a strategic focus on premium products. With demand expected to grow over the next 3-6 months, management anticipates a more favorable pricing environment, which should result in improved profitability. This strategy not only helps in maintaining price stability but also positions the company well to leverage upcoming demand growth while sustaining higher margins through its premium product portfolio.

Outlook and Valuation: Lower Infra spends and weak demand conditions in Q2FY25 slowed construction activity across sectors. However, demand is expected to rebound in H2FY25E, supported by budgetary allocations and progress in infrastructure projects. Additionally, the management’s focus on increasing premium product sales should help the company maintain resilience in a weak pricing environment, providing a competitive edge in the market. We expect Volume/Revenue/EBITDA to grow at a CAGR of 5.8%/4.0%/11.2% respectively over FY24-FY27E. Our target EV/EBITDA multiple is 18x (unchanged) on Sep-26E EBITDA, hence we ascribe a target price of INR26,186 upgrading our rating to HOLD.

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