Shree Cement strives to regain its mojo

The government’s continuous focus on infrastructure spending and house building activities is likely to drive cement demand from H2FY25. (File Photo: Mint)
The government’s continuous focus on infrastructure spending and house building activities is likely to drive cement demand from H2FY25. (File Photo: Mint)

Summary

  • While Shree Cement is grappling with weaker pricing trends in eastern India, there are glimmers of hope in its recent performance and future strategies. Investors have reasons to stay optimistic

The underperformance of Shree Cement Ltd's stock over the past year is glaring. Its shares have fetched modest returns of 7%, significantly lower than the 28% gains by close competitor UltraTech Cement Ltd, which has a pan-India presence. 

The lag in returns primarily stems from relatively weaker pricing trends in Shree Cement's core market of East India. However, some positives in the March quarter (Q4FY24) results, coupled with upbeat management commentary, are comforting and can bolster investor confidence.

For instance, Shree Cement's healthy profitability amid muted prices is notable. The company's better-than-anticipated Ebitda (earnings before interest, tax, depreciation, and amortization) in Q4FY24 was driven by higher grey cement realizations. 

Read This: For cement firms, Q4 could be forgettable as realizations crumble

In fact, Shree Cement reported the highest cement Ebitda per tonne of 1,347 in the industry for the third consecutive quarter, according to Nomura Financial Advisory and Securities (India). Shree Cement remains the lowest-cost producer, added the Nomura report.

Fuel costs were largely stable at 1.82/kcal in Q4FY24 and are expected to remain at this level in Q1FY25, the management said. The company continues to invest in cost-efficiency improvement measures such as higher green power share and logistics competence. 

The share of green power consumption in its total power consumption increased to 55.9% in FY24, the highest in the industry, from 51.1% in FY23. The management aims to increase the green power mix to 65% by FY26, likely ahead of peers. The company saves around 3 per unit of power from transitioning to green power, and total green power additions over FY25-26 are expected to be 188MW.

In Q4FY24, sales volume (cement and clinker) stood at 9.53 million tonnes (mt), up around 8% year-on-year. Sales volume guidance for FY25 was retained at 39-40 mt compared to 35.5 mt achieved in FY24. 

The management remains optimistic about cement demand growth despite the recent moderation, expecting the government’s continuous focus on infrastructure spending and house building activities to drive demand H2FY25 onwards.

Read This: As post-covid demand cements itself, this sector is eyeing a shift in gears

More importantly, Shree Cement's capacity expansion (capex) plans remain on track to reach 62 million tonnes per annum (mtpa) by FY25. The company will incur 12,000 crore capex over the next three years, financed via cash and internal accruals. 

The management has reiterated its target of reaching 80 mtpa capacity by FY28. Amid heightened competition, timely capacity additions provide volume growth visibility and should bode well for market share gains. A debt-free balance sheet is among other positives for Shree Cement. Note that UltraTech aims to turn net cash positive by FY25-end, excluding the Kesoram acquisition.

That said, the recovery in cement prices remains a crucial trigger for Shree Cement's earnings outlook and valuations. As it stands, there is no cheer on this front. 

More Here: Are cement stocks disconnected from reality?

According to the management, cement prices in Q1FY25 so far, compared to Q4FY24-exit prices, have been weak. The management expects prices to improve in H2FY25 as demand picks up. To buoy realizations, Shree Cement aims to increase the premium cement share to 12-15% (of total trade sales) as its recently launched premium brand ‘Bangur Magna’ gains traction. 

For now, earnings estimates have been trimmed by some brokerages. The underlying weakness in cement prices is leading to a 10%/4% cut in our FY25/26E Ebitda, respectively, said analysts at ICICI Securities Ltd.

Meanwhile, on the valuations front, Shree Cement's stock trades at a FY25 EV/Ebitda of 18.25 times, according to Bloomberg data. This is a slight discount to UltraTech’s 18.40 times multiple. EV is enterprise value. 

Historically, Shree Cement was always given a premium multiple over UltraTech, which has recently reversed, said an Incred Research Services report dated 16 May. Incred expects Shree Cement’s valuations to catch up with UltraTech's on the former's better profitability prospects. That said, pricing pressure and delays in plant commissioning are potential downside risks for the stock.

Also Read: Gautam Adani’s Ambuja Cements draws up $9-billion war plan for Ultratech battle

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