Neutral Shree Cement Ltd for the Target Rs. 30,030 by Motilal Oswal Financial Services Ltd
EBITDA below estimates; maintaining value focus
Premium cement share surges to ~21% vs. ~15% in 2QFY25
* Shree Cement’s (SRCM) 2QFY26 EBITDA was below our estimate due to higher-than-estimated opex/t. EBITDA (adjusted for one-off) stood at INR8.8b (up 48% YoY; ~9% below our estimates). EBITDA/t at INR1,106 grew 41% YoY (8% below our estimate). OPM expanded 4.4pp YoY to ~20% (vs. estimate ~23%). Adj. PAT grew ~215% YoY to INR2.9b (~36% beat, mainly due to higher other income and lower depreciation than our estimates).
* Management indicated that the reduction of GST on cement from 28% to 18% was a major positive reform, supporting long-term demand growth. The company fully passed on the GST benefits to customers. Despite heavy rains and a sharp decline in QoQ volume, realizations remained firm in 2Q. The company saw a sharp increase in the premium products share (as a % of trade sales), reaching ~21% vs. ~15% in 2QFY25, which is likely to remain at similar levels in the coming quarters. Capacity is expected to reach ~67mtpa by FY26-end, rising to ~72-75mtpa by end-FY27E and ~80mtpa by FY28-29E.
* We cut our EBITDA estimates by ~5%-7% for FY26-FY28E. Our EPS estimate for FY26 has been raised ~18% due to a reduction in depreciation guidance, while estimates for FY27/28 remain unchanged. SRCM trades at a rich valuation of 18x/16x FY27E/FY28E EV/EBITDA. We reiterate our Neutral rating with a revised TP of INR30,030 (based on 18x Sep’27E EV/EBITDA).
Volumes increase ~5% YoY; Opex/t up ~4% YoY/QoQ
* Standalone revenue/adj. EBITDA/PAT stood at INR43.0b/INR8.8b/INR2.9b (up 15%/48%/215% YoY and +2%/-9%/+36% vs. our estimates) in 2QFY26. Volumes grew ~5% YoY to 7.91mt (-2% vs. estimate). Blended realization grew 10% YoY (down ~2% QoQ) to INR5,440/t.
* Opex/t grew ~4% YoY/QoQ (+7% vs. estimate). Variable cost/other expense /freight cost per ton increased ~7%/6%/1% YoY. OPM expanded 4.4pp YoY to ~20%, and adj. EBITDA/t increased ~41% YoY to INR1,106. Depreciation/ interest costs declined 17%/11% YoY. Other income declined 12% YoY.
* In 1HFY26, standalone revenue/EBITDA/PAT stood at INR92.5b/21.0b/9.1b (up 8%/40%/122% YoY). OPM expanded 5.1pp YoY to ~23%. EBITDA/t grew ~42% YoY to INR1,248. OCF stood at INR7.5b vs. INR15.4b in 1HFY25. Capex stood at INR8.3b vs. 18.6b in 1HFY25. Net cash outflow stood at INR752m vs. INR3.2b in 1HFY25.
Highlights from the management commentary
* SRCM’s UAE operations recorded their best-ever quarterly performance, with volumes up ~34% YoY to 1.31mt, revenue up ~50% YoY, and EBITDA rising sharply by 158% YoY to AED52.5m. The improvement was driven by robust local demand, higher realizations, and better operational efficiency.
* Fuel costs increased to INR1.66/Kcal vs. INR1.59 in 1QFY26. Green power share stood at ~63% in 1HFY26.
* The company has commissioned a 3.65mtpa clinker unit at Rajasthan, with 3.0mpta cement mill expected in the near future. The 3mtpa integrated capacity at Kodla, Karnataka (brownfield expansion), is likely to be commissioned in 3QFY26.
Valuation and view
* SRCM’s operating performance was below our estimates due to higher opex/t, which was partly offset by better-than-estimated blended realization. The company saw a sharp increase in premium products shares, driven by its continuous efforts toward brand building and premiumization. However, lowcapacity utilizations (~53% in 2QFY26) led to negative operating leverage and higher opex/t. Further, we remain watchful for its next leg of capacity expansion announcement (regional mix/location) as the company progresses toward its 80mtpa target by FY28-29E.
* We estimate a CAGR of 8%/15%/26% in revenue/EBITDA/PAT over FY25-28E. We estimate a volume CAGR of ~6% over FY25-28E (as it continues to focus on value over volume). We estimate EBITDA/t of INR1,251/INR1,319/INR1,385 in FY26/FY27/FY28 vs. INR1,086 in FY25. We expect lower capacity utilization (~56- 59% over FY26-28) to lead to lower return ratios (ROE/ROCE at ~10% each, post tax, vs. historically in mid-teens). Further, we remain watchful of the company’s next leg of capacity expansion (to reach 80mtpa by FY28). The stock trades at a rich valuation of 18x/16x FY27E/FY28E EV/EBITDA. We reiterate our Neutral rating with a revised TP of INR30,030 (based on 18x Sep’27E EV/EBITDA).
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
