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Home / Markets / Mark To Market /  Shree Cement’s tag of ‘most valued cement stock’ is now at greater risk

The Street is upset with the subdued June-quarter earnings performance of Shree Cement Ltd. Its shares fell more than 4% on the NSE on Tuesday; it was the top loser among Nifty50 stocks. And why not! For a stock trading at a premium valuation multiple, lagging peers on crucial operating parameters is unlikely to be tolerated by investors.

A key disappointment came from its rising input costs, which offset better-than-anticipated growth in realizations. Consequently, its Ebitda/tonne at 1,481 was below the estimated range of 1,551-1,553. Ebitda is short for earnings before interest, tax, depreciation and amortization.

Playing catch-up
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Playing catch-up

It should be noted that while Shree Cement’s operating performance missed expectations in the June quarter, its peers recorded a beat.

“Shree maintained the lowest position on the industry cost curve, but continues to lose relative advantage—we expect the trend to continue. In 1QFY22, Shree’s Ebitda/tonne was slightly lower than Ambuja’s; probably for the first time on record," said analysts at Ambit Capital Pvt. Ltd.

Analysts caution that a relatively poor handle on costs than competitors could lead to a de-rating. On a one-year forward EV/Ebitda basis, the Shree Cement stock is trading at a valuation multiple of 19 times, shows Bloomberg data. EV is short for enterprise value. The company is the most expensive listed Indian cement stock, followed by close competitor UltraTech Cement Ltd, which is trading at a valuation multiple of 15 times.

And the weak operating performance is not the only threat to its valuations. Another factor that is making its investors nervous is the delay in meeting its ambitious target of doubling capacity.

Recall that the management had earlier indicated a target to raise its capacity from 43 million tonnes (mt) currently to 80 mt in five-six years; however, it later revised the deadline to FY30. Analysts say its earlier target implied a 12-14% annual increase in capacity; however, the revised timeline implies annual average growth of just 7%. This means it would be challenging for Shree Cement to grow continually at well-above industry growth rate going ahead.

Also, analysts at Motilal Oswal Financial Services Ltd point out that delayed expansions and low dividend would lead to an increase in cash pile from 8,500 crore in FY21 to 12,600 crore in FY23. This would keep the company’s return on equity subdued, they said in a report.

Meanwhile, in the June quarter, Shree Cement’s volumes fell 18% sequentially, albeit lower than the estimated quarter-on-quarter all-India industry volume decline of 23%. On a two-year CAGR basis, the company is leading with 6% volume growth, said analysts at foreign research house CLSA Ltd. The stock has been trading at rich valuations backed by positives such as industry leading growth, strong cash flows and its debt-free status. However, these positives are already baked in, analysts said. Besides, firms such as UltraTech Cement are reducing debt at a fast pace as well, thereby demanding higher valuations.

The stock has underperformed benchmark index Nifty50 and UltraTech in the past one year with 26% returns. The Nifty50 index and UltraTech stock have risen 44% and 88% in the same span. Apart from the above-mentioned factors, analysts say another reason for the underperformance is the company’s rising exposure to East India, which is facing a situation of over-supply. This would likely moderate gains in margins due to the muted pricing outlook in this region, analysts caution.

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