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In-line EBITDA; strategic hurdles loom in the near term

Focus on value over volume to help drive better realizations/t

* Shree Cement (SRCM)’s 2QFY25 EBITDA was in line as lower-than-estimated realization/t was offset by lower-than-estimated opex/t. EBITDA declined ~32% YoY to INR5.9m (in line), and EBITDA/t declined 27% YoY to INR780 (est. INR815). OPM contracted 3pp YoY to 16%. PAT declined 81% YoY to INR931m (vs. est. of INR738m, due to lower tax provisioning).

* Management indicated that it is following a strategy of value over volume. The company’s disciplined pricing and focus on premium products helped it report flat sequential cement realization/t vs. a decline for the industry. Management anticipates SRCM’s volume growth to be in line with the industry in 2HFY25. Ongoing capacity expansions of 15.4mtpa include grinding capacity spread across the North, including western UP (9.0mtpa), East (3.4mtpa), and South (3.0mtpa), which are likely to be commissioned by 1QFY26. SRCM reiterated its capacity target of +80mtpa by FY28 vs. 56.4mtpa currently.

* We cut our EBITDA estimates by 5% for FY25 and 2-3% for FY26/27. Our EPS estimates reduce by ~17-20% for FY25/26 and ~11% for FY27 due to likely accelerated depreciation on account of commissioning of new capacities. The stock is currently trading at 19x/17x FY26E/FY27E EV/EBITDA. Reiterate Neutral with a revised TP of INR23,910 (earlier 26,580).

Volumes decline 7% YoY; opex/t down 8% YoY

* Standalone revenue/EBITDA/PAT stood at INR37.3b/INR5.9b/INR931m (down 18%/32%/81% YoY and down 2%/3%/ up 26% vs. our estimate) in 2QFY25. Sales volumes declined 7% YoY to 7.6mt. Cement realization was down ~14% YoY (flat QoQ) at INR4,447/t.

* Opex/t declined 8% YoY in 2QFY25. Variable cost/t dipped 21% YoY, while freight costs/other expenses per ton increased 1%/7% YoY. OPM was contracted 3.2pp YoY to ~16% and EBITDA/t declined 27% YoY to INR780. Depreciation jumped 102% YoY, while interest costs declined 17% YoY. Other income grew 41% YoY.

* In 1HFY25, revenue/EBITDA/PAT stood at INR85.6b/INR15.1b/INR4.1b (was down 10%/16%/62% YoY). Volumes grew 1% YoY, while blended realization declined 11% YoY. EBITDA/t declined 17% YoY to INR875. Based on our estimates, the revenue/EBITDA/PAT may decline 4%/21%/52% YoY in 2HFY25. We estimate a flat YoY volume growth in 2HFY25 and EBITDA/t of INR1,105 vs. INR1,390 in 2HFY24.

Highlights from the management commentary

* Capacity utilization was ~56% (overall) in 2QFY25, with ~58% utilization in the North, ~63% in the East, and ~40% in the South. Current cement prices are better than the 2QFY25 average. However, sustained price improvement would be propelled by demand recovery.

* Avg. fuel cost declined to INR1.71/Kcal vs. INR2.05/INR1.76 in 2QFY24/ 1QFY25. In the current quarter, fuel consumption cost is INR1.65/Kcal due to the old inventory, while the current purchase price is INR1.51/Kcal.

* It has seven RMC plants currently in the West, South, and Mumbai markets. It is constructing plants in other regions and targets to reach double digits by FY25-end.

Valuation and view

* SRCM’s operating performance was in line with our estimates. However, a few strategic changes, such as a focus on brand equity and product premiumization, are near-term hurdles in gaining market share despite capacity expansions. The company reinstated a few previous brands, such as Roofon, under the premium category, and Shree Jungrodhak under the master brand Bangur, which also led to uncertainties over the company’s marketing strategies.

* We continue to believe most of the company’s expansions focus on existing markets (North, East, and part of South), while a large part of Central India and West will remain untapped until FY27E. We estimate a revenue/EBITDA CAGR of 5%/4% over FY24-27. The stock is currently trading at 19x/17x FY26E/FY27E EV/EBITDA. We reiterate our Neutral rating with a revised TP of INR23,910 (earlier INR26,580).

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