Shree Cement rating: ‘Buy’; Market share up without margin being hit

SRCM’s consistent track record of market share gains coupled with industry-leading margins justifies its premium valuation, in our view.

Shree Cement’s (SRCM’s) Q1FY21 standalone Ebitda of Rs 7 bn (down 22% y-o-y) was in line with our/consensus estimates. Market share gains continues for SRCM with volumes declining 18% y-o-y– better than industry decline of ~34%; while still sustaining blended Ebitda/te of Rs 1,421/te. SRCM’s consistent track record of market share gains coupled with industry-leading margins justifies its premium valuation, in our view.

Factoring in higher volumes, we raise our FY21e-FY22e Ebitda by 3-7% and EPS by 22-32% owing to lower depreciation and higher other income. With market share gains and better return ratios, we raise our target multiple to 17x (earlier 16x) and raise our target price to Rs 25,800/share (earlier Rs 22,400) based on 17x FY22e EV/E. Maintain Buy.

Standalone revenue down 23% y-o-y to Rs 23.3 bn: Cement plus clinker volume decline was lower at 19% y-o-y at 4.93mnte owing to market share gains in South and East regions. Blended realisation (including power segment) increased 1.2% q-o-q (declined 6% y-o-y) to Rs 4,717/te. Cement realisation increased ~5% q-o-q and was marginally down y-o-y, in our view.

Standalone Ebitda declined 22% y-o-y to Rs 7 bn: Blended Ebitda/te (including power) declined 5% y-o-y to Rs 1,421/te. With likely Ebitda loss in power segment, cement Ebitda/te is likely to be ~Rs 1,450/ te, in our view. Total cost/te fell 6.5% y-o-y to Rs 3,296/te. Raw material plus power & fuel cost/te declined 20% y-o-y/5% q-o-q owing to lower fuel prices. Freight cost/te surprised with 10% q-o-q/3% y-o-y increase due to higher lead distance.

Other expenses/te (including employee costs) were up only 1% y-o-y owing to firm control over fixed overheads. PAT rose 2% y-o-y to Rs 3.7 bn owing to lower depreciation and higher other income. Depreciation declined by a sharp 33% y-o-y/38% q-o-q to Rs 2.7 bn; while other income increased 2.4x y-o-y/27% q-o-q owing to higher treasury surplus led by equity raise of Rs 24 bn in Nov’19. Consolidated revenue/ Ebitda/ PAT stood at Rs 24.8/6.9/3.3 bn, respectively. UAE-based Union Cement Company’s performance was impacted with Ebitda loss of Rs 127 mn vs Ebitda of Rs 453 mn y-o-y.

We model standalone volume CAGR at 11% over FY20-FY22e and expect blended Ebitda/te to increase to Rs 1,598/te by FY22e from Rs 1,474/te in FY20. SRCM may generate FCF of Rs 49 bn after factoring in capex of Rs 29 bn over FY20e-FY22e with net cash increasing to Rs 79 bn by FY22.