Sell Shree Cement Ltd For Target Rs. 27,600- Choice Broking Ltd
Underperformance to Continue
We maintain our SELL rating on Shree Cement Ltd (SRCM). We downgraded SRCM to SELL in our Q4FY25 result update on May 15, 2025 . Ever since, SRCM declined by 3.3%, underperforming the peers which moved in the range of 3.0%-20.0%. Even after the underperformance, SRCM trades at FY27E EV/EBITDA & EV/CE multiples of 16.1x /3.4x, making it amongst the richest valued cement stocks under our coverage. At 6.7%/9.3% (FY26E), SRCM’s RoE/RoCE don’t cover its cost of equity and cost of capital at ~12.5%, even under optimistic assumptions. SRCM’s capital structure is sub-optimal with cash & equivalents on books 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. SRCM doesn’t intend to grow capacity beyond 80 Mnt by FY28E. Cash will continue to remain elevated at INR 117Bn by FY28E. SRCM is amongst the Best in Class in terms of 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 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 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 arrive at a 1-year forward TP of INR 27,600/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 27,600, 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.
Q1FY26 Results: Healthy Realization Dragged Down by Higher Costs
SRCM reported Q1FY26 Revenue and EBITDA of INR 49,480Mn (+2.3% YoY, -5.6% QoQ) and INR 12,291Mn (+34.1% YoY, -11.0% QoQ) vs Choice Institutional Equities (CIE) estimates of INR 48,622Mn and INR 12,658Mn, respectively. Total volume for Q1 stood at 9.0 Mnt (vs CIE est. 9.3 Mnt), down 7.2% YoY and 9.0% QoQ.
Realization/t came in at INR 5,528/t (+10.2% YoY and +3.8% QoQ), which is better than CIE’s est. of INR 5,245/t. Total cost/t came at INR 4,155/t (+2.2% YoY and +6.0% QoQ). As a result, EBITDA/t came in at INR 1,373/t, (+44.5% YoY and -2.2% QoQ), which is strong but in-line with CIE expectations of INR 1,366/t.
For Detailed Report With Disclaimer Visit. https://choicebroking.in/disclaimer
SEBI Registration no.: INZ 000160131
