Reduce Shree Cement Ltd For Target Rs.26,740 by Choice Institutional Equities Ltd
Cost normalisation and execution strength drive rating upgrade
We upgrade our rating to REDUCE (from SELL) on Shree Cement Limited (SRCM) with a revised Target Price of INR 26,740/share (earlier INR 23,330/share). The change in our stance is driven by:
(1) Temporary Q1FY27 cost headwinds, as margin was impacted by Middle East supply disruption; cost normalisation forecast from Q2FY27
(2) Improvement in product mix, with the company targeting ~70% trade sales
(3) Volume growth visibility, backed by management's 40 Mnt sales volume guidance for FY27E
(4) Capacity expansion, with the UAE’s grinding capacity set to double in Q3FY27
(5) Continued cost-optimisation through a higher share of green power (targeting 65% vs. 61% currently)
(6) A strong balance sheet, with the company continuing to maintain a large net cash and investment position.
SRCM remains one of the best-in-class cement companies, backed by disciplined execution, a premium brand franchise, superior operational efficiency and industry-leading EBITDA/t. We expect EBITDA/t to improve, from INR 1,139/t in FY26 to INR 1,320/t by FY29E, driven by a richer product mix, cost normalisation and higher green power usage. As a result, we estimate EBITDA to expand at 11.3% CAGR over FY26– 29E, supported by a healthy volume growth (5%/6%/7% in FY27E/FY28E/FY29E) and realisation growth of 3.5%/0.5%/0.5%, respectively, underpinning a steady improvement in earnings over the forecast period.
We value SRCM using the EV/CE methodology, assigning a 3.0x FY28E EV/CE multiple to derive our 1-year forward Target Price of INR 26,740/shar
Q1FY27 result: Elevated operating expenses erode pricing gains
SRCM reported Q1FY27 revenue and EBITDA of INR 56,227 Mn (+13.6% YoY,-0.4% QoQ) and INR 10,745 Mn (-12.6% YoY, -14.1% QoQ) vs CIE estimate of INR 54,359 Mn and INR 11,304 Mn, respectively. Total volume for Q1 stood at 10.5 Mnt (vs CIE estimate 10.0 Mnt), (+17.2% YoY, -2.6% QoQ).
Realisation/t, which came in at INR 5,360/t (-3.0% YoY and +2.3% QoQ), is lower than CIE’s estimate of INR 5,423/t. Total cost/t came in at INR 4,336/t (+4.3% YoY and +6.3% QoQ). As a result, EBITDA/t came in at INR 1,024/t (-25.4% YoY and -11.8% QoQ), which is in line with the CIE 0 estimate of INR 1,128/t.
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