Shree Cement rating – ‘Buy’: Robust second quarter for the company

SRCM’s Standalone EBITDA at Rs 9.9 bn (+17% y-o-y, +41% q-o-q) came in 10%/ 20% above our forecast/ Bloomberg consensus estimate, driven by higher volume (+14% y-o-y vs our estimate of +12% y-o-y) and 1% higher blended realisations at Rs 231/bag (vs estimate of Rs 229/bag). Overall per unit costs at Rs 3,114 (-9% y-o-y, -6% q-o-q) were also 2% below estimates. With higher realisation and lower opex, blended Ebitda at Rs 1,513/t (+3% y-o-y, +6% q-q) was 8% above estimate of Rs 1,403/t.

Rural and semi urban housing demand remains strong while infra demand has picked up. We expect demand recovery to accelerate further post festive period. We increase our FY21F/22F/23F cement volume assumptions by 14%/11%/8% and now assume 3% y-y growth in FY21F, followed by 17%/12% y-y growth in FY22-23F. We expect higher realisations to offset cost inflation and record-high Ebitda margins to sustain.

New capacities to drive above industry growth
SRCM has been gaining market share driven by ramp-up of newer capacities. Compared to ~6-12% y-o-y decline for large cap peers over past 12 months, SRCM’s volumes were up 1% y-o-y despite COVID-19 lockdowns. Now, with the commissioning of new 6mt capacity by Dec-20, we expect further market share gains for SRCM.

Recently announced clinker line-3 at Raipur should provide further headroom for growth in fast-growing East India. Further, management highlighted plans to increase grinding capacity from ~40mt to ~57mt over next three years and subsequently to ~80mt over the next 6-7 years.

Raise Ebitda/earnings and target price to Rs 27,500; upgrade to Buy

Driven by higher cement volumes and lower costs, we raise our FY21F/22F/23F core Ebitda by 16%/ 12%/9%, while earnings increase by sharp 36% in FY21F due to lower depreciation and by 13-15% for FY22-23F. We now expect 35% y-o-y EPS growth in FY21F followed by 20%/26% y-o-y growth in FY22-23F, for a 27% FY20-23F EPS CAGR. With above-industry growth rates and profitability, we now value SRCM on 17x Dec-22F EV/Ebitda (earlier 16x Sep-22F EV/Ebitda).

Driven by our Ebitda/multiple increases and roll-forward of valuations, we raise our TP to Rs 27,500 (from Rs 22,000), implying 17% upside. With an improved outlook and recent underperformance vs peers, we upgrade SRCM to Buy (from Neutral). The stock currently trades at 17.6x FY22F EV/Ebitda.