Sell Shree Cement Ltd for the Target Rs. 26,900 by Choice Institutional Equities
No scope for share price performance
We maintain our SELL rating on Shree Cement Ltd (SRCM) with a TP of INR 26,900 (INR 27,600/sh earlier). SRCM trades at FY28E EV/EBITDA & EV/CE multiples of 15.5x/3.3x, making it amongst the richest valued cement stocks under our coverage. At 6.7%/9.3% (FY26E), SRCM’s ROE/ROCE does not 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 ~INR 118 Bn (forming ~11.5% 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. This is owing to high levels of renewable/green power penetration (~60%) and limited scope to save on logistics, raw materials and other aspects. In our view, there is hardly any low-hanging fruit that the management can capitalise on so as to improve its return profile.
Despite such high levels of cash on books, SRCM does not have a commensurate capacity growth pipeline. Also, SRCM does not intend to grow its capacity beyond 80 Mnt by FY28/29E. Cash will continue to remain elevated at INR 127 Bn by FY28E. SRCM is amongst the best-in-class companies in terms of governance, management quality, brand equity, cost excellence and EBITDA/t. It is just that things are too good to get better, at a time when its valuation is demanding.
We forecast SRCM’s EBITDA to expand 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 26,900/share for SRCM. We value SRCM on our EV/CE framework, generously assign an EV/CE multiple of 3.3x/3.3x for FY27E/28E. Although SRCM’s ROCE is expected to expand from 7.2% in FY25 to 10.2% in FY28E, it does not 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 26,900, FY28E implied EV/EBITDA multiple is 15.1x, which is quite high given its return profile. Risk to our SELL rating includes stronger-than-expected sector tailwinds and investor apathy towards its valuation multiple.
Q2FY26 Results: Overall result weaker than expectations
SRCM reported Q2FY26 revenue and EBITDA of INR 43,032 Mn (+15.5% YoY, -13.0% QoQ) and INR 8,513 Mn (+43.7% YoY, -30.7% QoQ) vs Choice Institutional Equities (CIE) estimate of INR 42,400 Mn and INR 8,891 Mn, respectively. Total volume for Q2 stood at 8.1 Mnt (vs CIE est. 7.9 Mnt), (+6.8% YoY/-9.3% QoQ.)
Realisation/t, which came in at INR 5,300/t (+8.1% YoY and -4.1% QoQ), is weaker than CIE’s est. of INR 5,390/t. Total cost/t came in at INR 4,251/t (+3.1% YoY and +2.3% QoQ). As a result, EBITDA/t came in at INR 1,048/t, (+34.5% YoY and -23.7% QoQ), which is strong but lower than CIE est. of INR 1,130/t.
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