Shree Cement Rating ‘buy’; market share gains likely to offset lower prices

Shree Cement (SRCM) is likely to sustain its consistent track record of market share gains coupled with industry-leading margins, justifying its premium valuation. Its volume decline over the past two quarters has been lower vs industry average, while sustaining high profitability. With likely demand recovery post monsoons, SRCM may continue to gain market share backed by non-trade volume push in North, strong demand in East and higher y-o-y utilisation in South.

This may offset the impact of the recent seasonal price fall and costs increases on overall Ebitda. Risk-reward is favourable post recent price correction, in our view. We maintain our

FY21e-FY22e Ebitda (~15% ahead of consensus) with unchanged TP at Rs 25,800/share (17x FY22e EV/E). Maintain Buy.

Higher volumes to offset lower prices: SRCM’s volume decline was lower at 5% y-o-y in Q4FY20 and 19% y-o-y in Q1FY21 vs industry average decline of ~10% and ~34%, respectively, also aided by favourable market mix. With likely demand recovery post monsoons, SRCM (with lower utilisation vs. peers) may continue to gain market share backed by non-trade volume push in North, strong demand in East and higher y-o-y utilisation in South. This may offset the impact of recent price correction and cost increases on Ebitda. We model standalone volume CAGR at 11% over FY20-FY22e.

Prices in North could recover latest by Jan’21: Fight for market share in North resulting from ramp-up of a few newer capacities has put North prices, especially non-trade prices, under pressure for the past couple of months. With improving demand (also aided by low base of Q3FY20 due to construction ban in NCR) and higher utilisation (>80%), North prices should recover latest by Jan’21. Prices in East may not correct further substantially, given the already weak prices over past 2-3 years and cost escalations (some price hikes recently announced).

SRCM can double capacity over next 6-7 years: SRCM has more than doubled its domestic capacity to ~40mnte in the past six years and has grown volumes at 10% CAGR vs industry average of ~5.5%. 3-mnte (assuming 100% PSC) grinding unit (GU) in Odisha and 2-mnte GU in Pune are likely to be commissioned by Q3FY21e. The company may add line 3 clinkerisation in East region followed by a greenfield expansion in North region over the next 3 years. SRCM’s net cash would further increase to Rs 79 bn by FY22 from current Rs 37 bn even after factoring in capex of Rs 28 bn for organic expansions over FY20e-FY22e.

SRCM to sustain industry-leading profitability as well, given it enjoys lowest cost structure in the industry. Profitability can improve further by increasing the share of premium products, fixed costs rationalisation, optimising logistic costs (via additional GUs and increasing share of rail mix) and better operating leverage. During FY18-19, SRCM had increased the share of trade sales significantly and cushioned margin fall.