Capacity expansion of Shree Cement is on track, but near-term outlook is muted

The March quarter earnings of Shree Cement Ltd, announced on Saturday, were hardly exciting. Hit by higher-than-expected input costs, standalone Ebitda at 910.6 crore in Q4FY22, was much lower than consensus estimate of 1,010.7 crore. Ebitda is short for earnings before interest, tax, depreciation and amortization.

Muted cement prices in its key market of East India limited its ability to adequately pass on the burden of increased costs, said analysts. Consequently, the decline in operating margin continued. At 22.2%, its standalone operating margins fell to a three-year low in Q4FY22.

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To be sure, the entire cement industry is grappling with cost inflation, but in the case of Shree Cement, it is particularly disappointing because it has been enjoying premium valuations due to the ability to control costs better than competitors. In a report dated 23 May, analysts at Kotak Institutional Equities said Shree Cement’s Ebitda /tonne premium over Ultratech Cement Ltd has been declining for the past three years and has now converged.

Also, there was nothing much to cheer about on the volume growth front. In Q4FY22, cement volumes declined 2.3% year-on-year (y-o-y) to 8 million tonnes.

In FY22, its standalone cement volume growth at 3.3% was much lower than peers. Of course, the company is adding more capacities in East and North, and aims to reach 57 mtpa capacity in the next three years, but given the increased competitive intensity in these regions, market share gains may not be easy to come by. Mtpa is short for million tonnes per annum.

So, analysts are not too gung-ho on the stock’s near-term performance. Some of them have also trimmed the stock’s target price.

“We do not see a steep upside in the Shree Cement stock from the current level, at least in the near-term,” said an analyst with a domestic brokerage house requesting anonymity.

He added that even though its capacity expansions are on track, pace of improvement in existing capacity utilisation and meaningful price hikes are crucial. In FY22, its capacity utilization stood at 60%.

Note that the stock hit a new 52-week low of 21,650.00 on 7 March 2022 on the NSE. In the last one year, its shares have given negative returns of 20.6%, underperforming peers.

Meanwhile, going by the FY23 EV/Ebitda estimates of Axis Securities Ltd, the Shree Cement stock is trading at a valuation of 22x. EV is short for enterprise value. For FY24, the domestic brokerage house sees the multiple moderating to 17x.

The cost advantage enjoyed by Shree Cement is under pressure and the premium valuation accorded to the company for its operating efficiency is now at risk, said the Axis Securities report on 23 May.

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