Can volume chase aid Shree Cem?

Year-on-year growth was sharply higher compared to estimated industry growth of 10-12%, said analysts from Jefferies India. Further, three-year compound annual growth rate (CAGR) for Shree Cement in Q3 was about 9% versus industry CAGR of 6-7%, the analysts said in a report. Consequently, Shree Cement’s capacity utilization improved to 72% in Q3 versus 61% in Q3FY22. In an earnings call, the company management said FY23 exit volumes will be at 32mt, which implies 9mt volumes in Q4.

However, investors aren’t impressed, with its shares falling by almost 5% in the past two trading sessions. One factor weighing on sentiments could be muted realization (flattish quarter-on-quarter) led by weak cement prices. Further, the management said cement prices have remained flat in January and February compared to the December exit price.

Analysts warned that with several cement companies looking to commission capacities within 12-18 months, the industry’s pricing could come under pressure. In this backdrop, the management aims to improve the share of premium products to around 15% over the next few quarters from around 7%, by focusing on branding and marketing.

While price trends are crucial, for now, its margin outlook is improving. For instance, fuel cost fell to ₹2.53/kcal in Q3 from ₹2.83/kcal in Q2, and currently stands at ₹2.35/kcal, it added. This is expected to come down further in Q4.

“Lower energy costs and operating leverage benefits on strong volumes aid margin expansion,” said Kotak Institutional Equities analysts. Factoring in higher volumes, the broking firm has increased Ebitda estimates by 3%, 5% and 7% for FY23, FY24 and FY25, respectively.

For the medium term, Shree Cement’s management anticipates demand to outpace supply. The company reiterated its capacity guidance of 80mt by FY30 from 46 mt now, via capacity addition in favourable markets. It is exploring new markets via inorganic and organic routes. For FY23, its capex is pegged at ₹2,900 crore and at ₹3,300-3,500 crore for FY24.

Close competitor UltraTech Cement Ltd has also been on a capacity addition spree, lately. With the entry of the Adani group, widely-held expectations is that competition would rise. So, the chase for market share gains could get intense. In that context, capacity additions bode well for long-term volume growth.

Even so, Shree Cement is losing its operating cost edge over peers. “The efficiency gap between Shree Cement and peers is narrowing as companies focus on cost efficiency measures by increasing green power share and optimizing lead distance,” said analysts at Yes Securities.

Investors seem to have taken note. In the past one year, shares of Shree Cement have fallen by about 9%, against a 4.3% dip in UltraTech’s shares. But there is no respite on valuations. Shree Cement trades at a premium to UltraTech, but the gap has narrowed. At FY24, EV-Ebitda, Shree trades at a multiple of 18.4x, while UltraTech is at 15.8x, Bloomberg data showed.

“We don’t see much differentiators between the two, so we find Shree’s valuation expensive,” said Rajesh Ravi, institutional analyst, cement, HDFC Securities. “The low-hanging fruits, in terms of increasing focus on green energy to reduce carbon footprint and to aid more cost competitiveness, are priced in. As of now, there are no new levers that can drive a re-rating in the Shree Cement stock,” he added.