Markets
Shree Cement: Breaking ground with volumes
Summary
Shree did well on blended realization per tonne, which was up 6% y-o-y, coming in better than expectations.Shree Cement Ltd’s results for the March quarter (Q4FY23) are not inspiring, but they are not bad either. Shares of the company closed more than 1% higher on Tuesday, even though volume performance was a tad disappointing. Last quarter, Shree’s volumes rose by 10% year-on-year (y-o-y) to 8.83 million tonnes (mt). In comparison, peer UltraTech Cement Ltd’s volume growth stood at 14% y-o-y.
Even so, Shree did well on blended realization per tonne, which was up 6% y-o-y, coming in better than expectations. A key factor driving this beat is higher revenue from the power segment. In the Q4 earnings call, the company said the cement realization was higher by just 2% y-o-y.
However, the increase in blended realization did not translate into an expansion at the Ebitda (earnings before interest, tax, depreciation and amortization) level. Ebitda fell by 2% y-o-y even as revenue growth stood at almost 17%. High-cost inventory led to an 11% y-o-y drop in Ebitda per tonne to ₹1,011. As external power sales are also included in Shree’s standalone revenue, it is difficult to gauge Ebitda per tonne for the cement business only, said Satyadeep Jain, an analyst at Ambit Capital.
What is encouraging is that there are levers for margin expansion ahead. The management expects the benefit of falling prices of commodities such as petcoke would reflect in the coming one or two quarters. Fuel cost per kcal is expected to fall to ₹2.30-2.40 in Q1FY24. In Q4, fuel cost per kcal stood at ₹2.53, which was flat sequentially. Also, Shree’s premiumization efforts augur well. The mix of premium products was at 7.5% in Q4 and is expected to reach 15% by the end of FY24. This would lead to a benefit of ₹50 at the Ebitda per tonne level, said the company.
In FY24, while margin trajectory remains crucial, all eyes will be on volume performance. In FY23, volume growth was 15%. Shree is targeting a volume growth of 13% this financial year to 36 mt. This is higher than the estimated industry growth of 7-8%. The company acknowledges that its growth forecast is ambitious. To be sure, Q4 capacity utilization at around 78% means that there is scope for volume to expand. Moreover, capacity addition would boost volume growth.
The company expects demand in FY24 to be driven by the government’s thrust on infrastructure spending before the general elections. “The moot question is whether they can improve their brand/price positioning and bridge the gap with large-cap peers on pricing," said Jain. In the ongoing June quarter, realization is marginally lower on a quarter-on-quarter basis, said the company.
Meanwhile, Shree expects capital expenditure to be within the range of ₹3,300-3,500 crore in FY24. It expects to maintain the momentum on capacity growth. The company intends to reach its targeted capacity of 80 mt by FY30. It notes that it does not require additional debt to fund its capital expenditure plans. Separately, Shree aspires to become the greenest cement company in India. Its green power usage is currently at 55%.
In the past one year, Shree’s shares have risen by 13%. Analysts reckon valuations are not exactly cheap. “Return of (Shree’s) aggressive form is key monitorable," said Prateek Kumar, an analyst at Jefferies India in a report on 23 May. The brokerage maintains a ‘Hold’ rating on the stock on rich valuation and has broadly maintained its Ebitda estimates for FY24 and FY25. “We value Shree at 15 times March 2025 estimated Ebitda to arrive at a price target of ₹22,250," said Kumar in the report. On Tuesday, Shree’s shares closed at ₹24,765.80 apiece on NSE.
