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Shree Cement Ltd put up a good show in volumes for the September quarter (Q2FY23). In a seasonally weak quarter, the company’s volumes rose 18% year-on-year to 7.46 million tonnes. Growth is sharply higher than the estimated industry growth of high single digit for Q2, Jefferies India pointed out.

The street has overlooked that as profitability has been in focus in the light of cost pressures. A double blow of poor realizations and elevated operating expenses pushed the company’s earnings before interest, taxes, depreciation, and amortisation (Ebitda) per tonne to 701. This was the lowest in the last 28 quarters, according to analysts at Motilal Oswal Financial Services.

Weak show
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Weak show

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Dealers’ channel checks showed that cement prices did not see a meaningful revival in the monsoon quarter of Q2 in Shree’s key markets of north and east. However, the cost of international petroleum coke and imported coal have moderated from their recent peaks. This will benefit Shree as well as the entire sector’s operating margins from H2FY23 as high-cost inventory is exhausted.

Amid this, with the entry of the Adani Group, the sector’s competitive intensity is expected to rise. So, to protect market share, large-cap cement makers are in a capacity expansion mode. Shree intends to reach 55.9 million tonnes per annum capacity by FY25 and continues to expand across regions.

The good news is that there is scope for volume growth. Analysts at Nirmal Bang Institutional Equities noted that the current utilisation level for the company is at 62-64%, which offers plenty of growth opportunities. “With the recent capacity additions in the East and West markets and upcoming capacity in North and South regions, we expect Shree Cement to continue to deliver higher-than-industry volume growth, along with geographic diversification," the domestic brokerage house said.

However, there is a flip-side. “Its cost benefits versus peers is shrinking as other cement companies increase green power usage, and dependence on split grinding units," the Motilal Oswal report said. The stock trades at a FY24 EV/Ebitda of 16.66x, showed Bloomberg data. This is a tad higher than close competitor Ultratech Cement’s 16.25x. So far in 2022, shares of Shree have fallen by 23%, underperforming those of Ultratech and the Nifty 50 index. Gradual de-rating and underperformance should continue, considering its expensive valuation, said analysts at Kotak Institutional Equities.

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