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Shree Cement Ltd reported Q1FY25 volumes of 9.6mnt, marking an increase of 1.2% QoQ and 8.3% YoY. Despite weak demand due to the general election and monsoon, the company achieved positive volume growth, resulting in revenues of INR48,347mn, a decline of 4.7% QoQ and 2.7% YoY. The revenue drop was primarily due to weak pricing. Shree Cement Ltd. capacity utilization for Q1FY25 stood at 76%. The EBITDA/t for the quarter was INR951/t, down 31.7% QoQ and 9.3% YoY, largely driven by higher freight expenses. The PAT for the quarter was INR3,177mn, a decrease of 52.0% QoQ and 45.3% YoY. EPS for Q1FY25 were INR88.1. Sale of premium products stood at 7.6% of total trade sale volume.

* Expansion plans on track: Shree Cement Ltd. is actively working to expand its capacity to 80mnt by the end of FY28E. For FY25E, the company plans to invest INR40,000mn. In the recent quarter, the company commissioned a new integrated cement unit in Guntur district, Andhra Pradesh, with a production capacity of 3.0MTPA. Additionally, ongoing expansion projects in Jaitaran, Rajasthan (6.0 MTPA), Kodla, Karnataka (3.0 MTPA), Baloda Bazar, Chhattisgarh (3.4 MTPA), and Etah, Uttar Pradesh (3.0 MTPA) are progressing well according to schedule. The company is also focused on further expanding its capacities across different regions to meet its targets ahead of schedule. The management aims to reach a capacity of 62mnt by March 2025E, 65mnt by September 2025E, and ultimately 75mnt by March 2027E.

* EBITDA/t dropped to INR951/t: During the quarter, EBITDA/t was significantly impacted by three key factors: First, there was a shift in the company's geographical mix, with a marginal reallocation of business focus from the North region to the East region. The East region, known for its lower realizations, pulled down the weighted average realization across the company’s operations. This shift in mix consequently had a negative effect on EBITDA. Second, freight expenses/t for the quarter came in at INR1,157/t, representing a 5.5% increase QoQ but a 3.1% decrease YoY. The QoQ increase in freight costs was primarily driven by an increase in lead distance, which rose by 21km compared to the previous quarter. The longer transportation distances directly contributed to the higher freight expenses. Third, other expenses/t for the quarter were INR775/t, up 8.0% QoQ and 5.2% YoY. This increase was largely attributed to the higher stabilization costs incurred following the commissioning of two new plants in Nawalgarh and Guntur. Additionally, advertising expenses also saw a rise due to the launch of the company’s new brand identity. Moreover, the Guntur and Nawalgarh plants specifically incurred an additional INR520mn in fares during Q1FY25, further contributing to the increase in other expenses. These combined factors collectively exerted downward pressure on the company’s EBITDA/t for the quarter.

* Reduced guidance for FY25E: The company is revising its guidance, now indicating that it will grow in line with the market, as opposed to its earlier projection of achieving 40mnt in sales volume for FY25E. Management anticipates that both Q2 and Q3 will likely remain weak due to lower demand and reduced pricing power within the industry.

Outlook and Valuation: The company expects demand for cement and other building materials to be driven by the Indian government's commitment to modernizing the country's infrastructure, supported by the 11 lakh crore capital expenditure announced in the Indian Budget 2024 and various related projects and allocations. However, despite this positive outlook, the company has reduced its guidance due to weaker-than-anticipated demand. We expect Revenue/EBITDA to grow at a CAGR of 5.3%/7.5% respectively over FY24-FY26E. Our target EV/EBITDA multiple is 18x (unchanged) on FY26E EBITDA, hence we ascribe a target price of INR24,765 downgrading our rating to SELL.

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