Buy Shree Cement; target of Rs 22,360: Motilal Oswal
Motilal Oswal is bullish on Shree Cement has recommended buy rating on the stock with a target price of Rs 22,360 in its research report dated September 13, 2017.
Motilal Oswal's research report on Shree Cement
Capacity addition will likely slow down from 5% over FY12-17 to sub-2% in the next five years. This, coupled with stable demand, should drive utilization improvement in the next 3-4 years. Per capita cement consumption in India continues to be among the lowest in the world, the improvement in which could drive structural growth in India's cement industry. Limestone reserves in India are scarce and can support demand only for the next 6-7 years before getting fully utilized. Import of cement does not pose a major threat for India due to the relatively cheap price of delivered cement. The company is likely to report growth at 1.5-2x that of industry average, led by capacity addition ahead of industry. SRCM will continue enjoying cost efficiency due to its capability to put up cement plants at 30-40% lower cost than industry. Hence, it will not bid for any expensive acquisition. Given its relatively healthy balance sheet, the company is likely to reward investors with a dividend payout.
SRCM is the most cost-efficient cement producer in India. Its superior execution capability enables it to achieve RoIC of over ~50% (FY19E). SRCM’s gross -block - to-capacity (GB/capacity) – currently at ~USD53/tonne – has been structurally trending downward, as the proportion of brownfield expansion has increased. Its GB/capacity is at 28% discount to peers, which is also reflected in its superior RoCE. We believe SRCM deserves to trade at premium valuations; we value the cement business at 15x FY20E EV/EBITDA to arrive at a target price of INR22,360. Maintain Buy.
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