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Expanding footprint largely in existing markets

Focus shift on improving brand equity

* Shree Cement (SRCM) has been consistent in capacity expansion (mostly through organic routes), with a capacity CAGR of ~12% over FY14-24. The company plans to increase its grinding capacity organically at a similar CAGR over FY24-27E to reach 65mtpa/75mtpa by FY26E/FY27E. However, most of these expansions will focus on its existing markets and a large part of Central and West regions will remain untapped till FY27E.

* SRCM is one of the lowest-cost producers in the cement industry. Now, it is also focusing on improving brand equity by enhancing consumer pull for its products in the market, and increasing premium product share. SRCM has revamped its brand strategy and launched ‘Bangur’ as the master brand for all product categories across markets.

* SRCM’s cumulative capex of INR90b over FY25-26E will exceed total OCF of INR78b over the same period. We cut EBITDA estimates for FY25/26 by 5% (each) due to pricing pressure (all-India average cement price declined 5- 6% QoQ in 4QFY24E). The stock currently trades at 18x/16x FY25E/FY26E EV/EBITDA. We reiterate our Neutral rating and value SRCM at 17x FY26E EV/EBITDA to arrive at our TP of INR27,700

Expanding capacity within the same Geographical reach

* SRCM capacity CAGR slowed down to ~5% over FY20-23 vs. its historical CAGR of over 10%. Now, the company is again scaling up its capacity expansion plan. In FY24, the company increased domestic clinker/grinding capacity by 3.8mtpa/7.0mtpa to 33.4mtpa/53.4mtpa. It commissioned – 1) a greenfield integrated cement plant at Nawalgarh, Rajasthan, having clinker/ grinding capacity of 3.8mtpa/3.5mtpa, 2) a greenfield grinding unit at Purulia, West Bengal, with a capacity of 3mtpa; and 3) debottlenecking at Seraikela, Jharkhand, of 0.5mtpa grinding capacity.

* It plans to increase domestic grinding capacity to 65mtpa/75mtpa by FY26E /FY27E and 80mtpa in the long run, through a mix of greenfield/brownfield expansions. SRCM’s expansion plans (up to 75mtpa) are largely focused on existing locations (North, East and part of South region). However, a large part of Central and West regions will remain untapped till FY27E.

* We estimate the company’s capacity/volume CAGR at ~11%/10% over FY24-26E as compared to capacity/volume CAGR of ~7%/6% over FY19-24. Further, we estimate capacity average utilization at ~70% over FY24-26 vs. average utilization of ~66% over FY19-23.

* SRCM announced foray into RMC business. The company recently acquired five operational plants with an aggregate capacity of 422 cum/hr at a cash consideration of INR335m. These plants are located in Mumbai Metropolitan Region. It also commissioned greenfield RMC plant having a capacity of 90 cum/hr in Hyderabad. The company’s combined RMC capacity now stands at 512 cum/hr.

Low-cost producer; now also focusing on improving brand equity

* SRCM is one of the lowest-cost cement producers in the industry, backed by a) a higher share of green power (WHRS, solar and Wind power), which fulfils 57% of its power requirements, b) high dependence on split grinding units, c) high alternative raw material consumption with ~28% in total raw material consumption; and d) lower specific power consumption (68Kwh/t of cement). We believe the company has limited scope for incremental cost savings. Further, in the past few years, its cost-efficiency gap with peers has narrowed.

* Now, it is also focusing on improving brand equity by enhancing consumer pull for its products in the market, and increasing premium product share. SRCM has revamped its brand strategy and launched ‘Bangur’ as the master brand for all product categories across markets. This was implemented with a new brand identity through a new logo and modern packing designs. A new multi-media advertising campaign has been launched across television, outdoor, print, digital, and retail touchpoints.

* It streamlined premium product offerings with one premium product – “Bangur Magna” across the markets. The company’s premium product share stood at ~9% and it targets to increase it to ~15% by FY25.

Valuation expensive; reiterate Neutral

* We estimate SRCM’s EBITDA to report ~13% CAGR over FY24-26, led by ~10% volume growth and ~3% improvement in EBITDA/t. We estimate its blended EBITDA/t at INR1,225/INR1,260 in FY25/FY26 vs. an estimated EBITDA/t of INR1,190 in FY24 (average EBITDA/t stood at INR1,250 over FY19-23).

* We estimate SRCM to generate cumulative OCF of INR78b over FY25-26 while, estimated capex of INR90b. We expect the company to post FCF outflow until FY26 due to accelerated growth plans (capex guidance of INR125b over FY25- FY27), leading to a negative FCF yield. Its net cash is estimated to decline to INR37b vs. INR60b as of Dec’23, given the aggressive expansion plans, which entails a higher capex.

* We cut EBITDA estimates for FY25/26 by 5% (each) due to pricing pressure (allIndia average cement price declined 5-6% QoQ in 4QFY24E). The stock trades at 18x/16x FY25E/FY26E EV/EBITDA (vs. its 10-year average one-year forward EV/EBITDA of 20x). We reiterate our Neutral rating and value SRCM at 17x FY26E EV/EBITDA to arrive at our TP of INR27,700.

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