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Subdued performance as geo-mix change hurts

Expects volume growth to be in line with the industry in FY25

* Shree Cement (SRCM)’s 1QFY25 EBITDA was significantly below our estimate, primarily due to a lower-than-estimated realization (6% miss). EBITDA was down 2% YoY to INR9.2b (est. INR11.8b) and EBITDA/t stood at INR951 (est. INR1,239). OPM was flat at 19% (est. 23%). PAT declined 45% YoY to INR3.2b (est. INR5.4b).

* Management indicated that cement demand would remain weak until CY24-end and expects a full recovery from 4QFY25. SRCM expects volume growth to be in line with the industry in FY25. Further, pricing is a function of demand, and if demand remains weak, prices will weaken. The company is currently working on the 15.4mtpa grinding capacity addition at various locations, to be commissioned in phases until FY26-end.

* We cut our EBITDA estimates by 12%/5% for FY25/26. The stock is currently trading at 19x/17x FY25E/FY26E EV/EBITDA. Reiterate Neutral with a revised TP of INR27,500.

Volumes rise 8% YoY; cement realization down 6% YoY

* Standalone revenue/EBITDA/PAT stood at INR48.3b/INR9.2b/INR3.2b (down 3%/2%/45% YoY and down 5%/23%/42% vs. our estimate) in 1QFY25. Sales volumes grew 8% YoY to 9.53mt. Cement realization declined ~6% YoY (~5% QoQ) to INR4,469/t. * Opex/t declined 10% YoY (in line) in 1QFY25. Variable/freight costs per ton dipped 20%/3% YoY, while other expenses/t increased 5% YoY. OPM was flat YoY at ~18% and EBITDA/t declined 9% YoY to INR951.

* Depreciation rose 108% YoY due to the commissioning of a new plant in 1HCY24. Interest costs declined 24% YoY and ‘other income’ was down 17% YoY. ETR was ~9.0% (est. 25.5%) during the quarter.

Highlights from the management commentary

* The company’s overall volumes grew ~8% YoY, led by ~15% YoY growth in the East, and ~7% YoY growth in the North, while volumes in the South declined ~5% YoY (up 11% QoQ in the East, down 3% QoQ in the North, and down 4% QoQ in the South).

* Average fuel consumption cost/kcal stood at INR1.76 vs. INR1.82 in 4QFY24. The share of green power stood at ~54% in 1QFY25 vs. 56% in 4QFY24. Lead distance increased 21km QoQ in 1QFY25 due to the change in geo-mix, which led to a sequential increase in freight cost/t.

* It retains a capex guidance of INR40b annually for the next three years. It plans to setup 100 concrete plants in the next five years, in 50+ cities.

Valuation and view

* SRCM posted an underwhelming performance in 1Q with a higher decline in realization (down 6% QoQ vs. ~2-3% decline for peers; 6% below our estimate). However, the cost was in line with our estimates. Management indicated that cement demand will remain weak until CY24-end, which will also adversely impact prices.

* 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 revenue/EBITDA CAGR of 9%/10% over FY24-27. The stock is currently trading at 19x/17x FY25E/FY26E EV/EBITDA. We reiterate our Neutral rating with a revised TP of INR27,500 (earlier INR30,300).

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