Hold Shree Cement; target of Rs 26,830: Prabhudas Lilladher

Prabhudas Lilladher's research report on Shree Cement

Shree cement’s (SRCM) reported Q3FY22 EBITDA below our/consensus estimates (CE) by 7%/10% at Rs8.26bn, down 24% YoY. Earnings for the quarter are expected to have benefitted by strong earnings from sale of power against break-even in base quarter. We trim our EBITDA estimates by 6.3%/3.7%/3.6% for FY22e/FY23e/FY24e due to lowered cement margins. SRCM maintained meaningful differential in EBITDA margins over its peers (Ambuja and Ultratech) on back of higher share of cheaper renewable power, indirect tax incentives and logistics advantage. However, the gap has contracted significantly over last one year due to optimisation of realisations and extensive work on rationalisation of freight cost done by the peers.

Outlook

We believe that gap would further narrow down with multi-fold increase in share of renewable power and further reduction in lead distance coupled with commissioning of new plants. Given the expensive valuations (EV/EBITDA at 15.4x FY24e) and high expectations on both margins (Rs1,450/t) and volume growth (CAGR of 12% over FY22-FY24e), we expect stock to extend its underperformance to peers and broader indices. We maintain Hold rating with revised TP of Rs26,830 (earlier Rs28,000), EV/EBITDA of 16.5x FY24e