Upgrade to ADD on Shree Cement - Robust volume growth and margin sustained - HDFC Securities

Mr. Rajesh Ravi, Institutional Research Analyst, HDFC Securities

Shree Cement (SRCM) reported a strong 3QFY21. Standalone net sales/EBITDA/APAT rose 16/28/102% YoY to INR 33.1/10.9/6.3bn respectively. This is led by strong 15% YoY volume uptick and as margin firmed up, 11% YoY to INR 1,511/MT on lower opex. SRCM continues to deliver industry- leading operating performance and return ratios, owing to its robust cost controls and its strong focus on high trade sales (~75-80%). We upgrade to ADD with an unchanged SOTP-based target price of INR 25,500.

Robust volume growth: SRCM's 3QFY21 volumes rose 15% YoY, mainly driven by strong growth in the eastern region and rising sales in the southern region. Utilisation firmed up to 71% vs 62% YoY. Share of trade sales remained flattish at ~77%. NSR fell 1% QoQ (down 2% YoY), mainly pulled down by price correction in the east and south markets.

Cost reduction keeps margin buoyant: SRCM's opex fell 7% YoY due to fuel mix optimisation and strong cost controls. On QoQ basis, higher fuel prices led to ~5% rise in its power cost (on calorific value basis). Freight cost was up 5% QoQ on rising share of the east (in SRCM's sales mix) and higher diesel prices. However, fixed costs control and op-lev gains offset the impact, leading to 2% QoQ opex decline. Subsequently, unitary EBITDA (standalone) remained flat QoQ at INR 1,511 (up 11% YoY).

Subsidiary performance, Capex updates: During 3QFY21, while SRCM's UAE subsidiary reported a 22% revenue decline YoY to INR 2.32bn, its EBITDA rose 22% YoY to INR 370mn on lower input costs. SRCM will commission its 3mn MT split grinding units in Odisha and Maharashtra each in 4QFY21. Thereafter, it will commission the ongoing 4mn MT clinker expansion at Chhattisgarh by Sep'22E. These will increase SRCM's standalone clinker/cement capacity to 29/46mn MT by FY23E.

Outlook: SRCM continues to deliver industry-leading operating performance and return ratios, owing to its robust cost controls and strong focus on high trade sales (~75-80%). We maintain our earnings estimates and our SOTP-based target price of INR 25,500. We value its standalone business at 16.5x its Dec'22E EBITDA and its UAE subsidiary at 1x BV. We upgrade rating to ADD from REDUCE earlier.

Shares of SHREE CEMENT LTD. was last trading in BSE at Rs.26000 as compared to the previous close of Rs. 26411.4. The total number of shares traded during the day was 2476 in over 1013 trades.

The stock hit an intraday high of Rs. 26700 and intraday low of 25754.7. The net turnover during the day was Rs. 64799617.

Source : Equity Bulls

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