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Home / Markets / Mark To Market /  Shree Cement is losing its key edge over peers

Shree Cement Ltd’s December quarter (Q3FY22) earnings were quite disappointing. Cement sales volumes fell by 8.3% year-on-year (y-o-y) to 6.55 million tonnes, impacted by the strike by transporters in markets such as Chhattisgarh.

Cost inflation meant standalone earnings before interest, taxes, depreciation, and amortization (Ebitda) per tonne was the lowest in the past few quarters at 1,260. Higher sales of traded goods, where the company bought thermal coal globally and sold to its subsidiary in the UAE, also weighed on its costs. So, its total cost per tonne spiked to a multi-quarter high of 4,162.

Cost pinch
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Cost pinch

“Shree Cement has been the industry leader on costs, driven by its early adoption of waste heat recovery system, petroleum coke (as kiln fuel), and split grinding model (saving freight cost). However, industry has been catching up fast with Shree Cement on these aspects, reducing its cost competitiveness," analysts at Axis Securities Ltd said in a report on 4 February. Against this backdrop, the absence of any cost reduction programme would lead to muted earnings growth, noted the domestic brokerage house.

The entire cement sector is battling cost inflation, but for Shree Cement a weak grip on costs would mean losing its edge over peers. This would be a dampener for the stock’s valuations. “For quite some time, Shree Cement has enjoyed the highest valuation multiple among listed cement stocks, mainly because of its cost leadership," said an analyst at a domestic brokerage house requesting anonymity.

The valuation gap between Ultratech Cement Ltd, which is the second most expensive cement stock, and Shree Cement has narrowed in recent quarters, the analyst said. “While Shree Cement is debt-free, Ultratech is on its track to be there soon. So, if this trend (elevated operating cost) doesn’t reverse, Ultratech could overtake Shree on the valuation front," he said. Ultratech aims to pare its entire debt by FY23.

Meanwhile, the consolidated FY23 EV/Ebitda multiple for Shree Cement and Ultratech is 16.93times and 15.57times, respectively, according to Bloomberg data. EV is enterprise value. Despite a rich multiple, Shree Cement stock has been a laggard. In the last one year, Ultratech shares have risen by 20%, meaningfully overtaking Shree Cement, which declined by around 9% in the same period. Besides cost inflation, a concern for the stock is a relatively higher exposure to the East, a market facing oversupply, thus keeping cement price growth muted in the region.

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