BackShree Cement loses some ground to UltraTech in valuation contest
Shree Cement’s volume growth of 15% y-o-y was ahead of the Street’s 11-12% growth expectationUltraTech saw a volume growth of 14% y-o-y in Q3, with it aiming to become net debt free by FY23
PremiumShree Cement Ltd reported stellar earnings in the December quarter, exceeding analysts’ estimates on many parameters. Volume growth of 15% year-on-year (y-o-y) was ahead of the Street’s estimated 11-12% growth range. Although Shree’s earnings were better than estimates, close competitor UltraTech Cement Ltd also posted impressive earnings. UltraTech’s volumes grew 14% y-o-y in Q3FY21.
But a key highlight of the latter’s earnings announcement was its target to become net debt-free by FY23. UltraTech’s sharpened focus on debt repayment has, among other things, helped its stock bridge the gap with Shree, which is the most expensive cement stock. In the past two months, UltraTech shares have risen around 24%, compared to a mere 4% rise in shares of Shree Cement.
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Analysts at domestic brokerage IDBI Capital Ltd said Shree’s valuation premium to UltraTech has narrowed to 54%, compared to the highs of 80% seen in the past.
Shree’s cost leadership, timely capacity additions and debt-free status have contributed to its rich valuation multiple. Second, a key catalyst for the Shree Cement stock has been its massive expansion plan. But the recent delay in the commissioning of some units has got analysts a bit worried. “While the management has guided it will double capacity to 80 mtpa by FY27, execution has been slower than anticipated, with only one expansion (of 4 mtpa) having been announced in the east. Therefore, we expect the cash pile to grow further, diluting RoE by 200 bps to 15% over FY21-23E," analysts at Motilal Oswal Financial Services Ltd said in a report on 1 February. One basis point is one-hundredth of a percentage point. RoE is return on equity.
In a post-earnings call, the Shree Cement management said its grinding units in Maharashtra and Odisha are expected to be commissioned in Q4 FY21 versus December 2020 guided earlier.
Many cement companies, including UltraTech, announced expansions in the east. Although demand in the region is recovering, analysts said it is going to be a fight for market share at the expense of margins.
Further, the ongoing probes by the Competition Commission of India will keep cement makers from taking steep hikes despite cost pressures. In this backdrop, analysts are uncomfortable with Shree’s valuations.
“We remain cautious on near-term cement prices given the regulatory overhang. Moreover, costs are most likely to rise for power, fuel and freight. We believe Shree’s sector-leading returns are fairly factored into its valuation. While the valuation differential to peers is partly bridged, at a 17.5 times FY22 EV-Ebitda, it still looks demanding despite higher returns," foreign research house CLSA said in a report on 1 February. EV stands for enterprise value; Ebitda stands for earnings before interest, tax, depreciation and amortization.
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