Sell Shree Cement Ltd For Target Rs. 27,000 - Choice Broking Ltd
Sub-optimal capital structure with limited room for value addition
We downgrade Shree Cement Ltd (SRCM) from HOLD to SELL. SRCM trades at FY27E EV/EBITDA & EV/CE multiples of 16.2x /4.5x, making it amongst the richest valued cement stocks under our coverage. At 6.7%/7.6% (FY26E), SRCM’s RoE/RoCE don’t cover its cost of equity and cost of capital at 12.5%/12.4%, even under optimistic operational assumptions. SRCM’s capital structure is sub-optimal with cash & equivalents on books (which includes cash & bank balance, current investments & cash-like components in non-current investments at FY25 end) at ~INR118 Bn (forming ~10.6% of current market cap). We believe this high level of cash is an overhang.
That apart, there is limited scope for SRCM’s best-in-class management to improve its RoCE by cost take-out initiatives, which its other less efficient peers are implementing. SRCM’s cost structure is already amongst the most efficient in the industry, with high levels of renewable/green power penetration (~60%) and limited scope to save on logistics, raw materials, and other aspects. In our view, there are hardly any low-hanging fruits that the management can capitalise on, to improve its return profile.
Despite such high levels of cash on books, SRCM doesn’t have a commensurate capacity growth pipeline. Management doesn’t intend to grow capacity beyond 80 Mnt by FY28E. Cash will continue to remain elevated at INR117 Bn by FY28E. There is no denial that SRCM is amongst the Best in Class in terms of corporate governance, management quality, brand equity, cost excellence, EBITDA/t etc, it's just that things are too good to get better, at a time when its valuation is demanding
We now incorporate a robust EV to CE (Enterprise Value to Capital Employed) based valuation framework (Exhibit 3), which allows us a rational basis to assign the right valuation multiple to value SRCM.
We forecast SRCM’s EBITDA to grow at a CAGR of 15.3% over FY25-28E based on our volume growth assumptions of 6%/6%/6%, and realisation growth of 6.0%/1.0%/1.0% in FY26E/27E/28E, respectively.
We arrive at a 1-year forward TP of INR 27,000/share for SRCM. We now value SRCM on our EV/CE framework – we generously assign an EV/CE multiple of 3.4x/3.4x for FY27E/28E. Although SRCM’s ROCE is expected to expand from 7.2% in FY25 to 10.2% in FY28E, it doesn’t cover capital cost even in FY28E. We do a sanity check of our EV/CE TP using the implied EV/EBITDA multiple. On our TP of INR 27,000, FY27E implied EV/EBITDA multiple is 16.1x, which is quite high given its return profile. Risk to our Sell rating includes stronger-than-expected sector tailwinds, lack of investor apathy towards its valuation multiple.
Q4FY25 Results: EBITDA in line with expectations
SRCM reported Q4FY25 Revenue and EBITDA of INR52,402 Mn (+3.3% YoY, 23.7% QoQ) and INR13,183 Mn (+4.1% YoY, +45.9% QoQ) vs CEBPL estimates of INR50,007 Mn and INR13,860 Mn, respectively. In our view, the market expectation of Q4FY25 EBITDA was INR 12,500-14,000 Mn, so the reported numbers are in line with street expectations. Total volume for Q4 stood at 9.8 Mnt (vs CEBPL est. 10.1 Mnt), up 3.3% YoY and 12.2% QoQ.
Blended Realization/t came in at INR5,325/t (flat YoY and +10.3% QoQ), which is better than CEBPL’s est of INR4,974/t. Total cost/t came at INR3,922/t (-0.2% YoY and +4.6% QoQ). As a result, EBITDA/t came in at INR 1,404/t, (+0.8% YoY and 30.1% QoQ), which is strong but in-line with expectations.
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