Can Volume Chase help Mr. Kem?

Analysts at Jefferies India said the year-on-year growth was sharply higher than the expected industry growth of 10-12%. Moreover, the three-year compound annual growth rate (CAGR) for Shree Cement in the third quarter was around 9% versus the industry CAGR of 6-7%, analysts said in a report. As a result, Shree Cement’s capacity utilization stood at 72% in Q3 FY22 as against 61% in Q3 FY22. In an earnings call, the company management said that FY23 exit volumes would be at 32mt, implying 9mt volumes in Q4.

However, investors are not impressed, with its shares down nearly 5% in the past two trading sessions. A factor weighing on the sentiment could be muted realizations (flat quarter-on-quarter) due to weak cement prices. Further, the management said that cement prices in January and February have been flat as compared to the December exit price.

Analysts warn that with many cement companies looking to start capacity within 12-18 months, industry prices could come under pressure. Against this backdrop, the management aims to improve the share of premium products from around 7% to around 15% over the next few quarters by focusing on branding and marketing.

While price trends are important, for now, its margin outlook is improving. For example, the cost of fuel fell from 2.53/Kcal in Q3 2.83/kcal in Q2, and currently stands at 2.35/Kcal, it added. It is expected to come down further in the fourth quarter.

“Operating leverage benefits on lower energy costs and strong volumes aid margin expansion,” said analysts at Kotak Institutional Equities. respectively.

Over the medium term, Shree Cement’s management expects demand to exceed supply. The company reiterated its capacity guidance of 80 million tonnes by FY30 from 46 million tonnes now through capacity additions in favorable markets. It is exploring new markets through inorganic and organic routes. For FY23, its capex is pegged at 2,900 crores and on 3,300-3,500 crores for FY24.

Close competitor UltraTech Cement Ltd. has also been on a capacity expansion spree in the recent past. With the entry of the Adani group, there are widely held expectations that competition will increase. In such a situation, the competition to gain market share may intensify. In that context, capacity addition bodes well for long-term volume growth.

Still, Shree Cement is losing its operating cost edge over its competitors. “The efficiency gap between Shree Cement and peers is narrowing as companies focus on cost efficiency measures by increasing green power share and optimizing lead distance,” said analysts at Yes Securities.

It seems that investors have taken note. In the last one year, Shree Cement shares have declined nearly 9% as against 4.3% fall in UltraTech shares. But there is no relief on valuation. Shree Cement is trading at a premium to UltraTech, but the gap has narrowed. In FY24, Shree trades at an EV-Ebitda multiple of 18.4x, while UltraTech is at 15.8x, shows Bloomberg data.

“We do not see much difference between the two, hence we find Shree valuations expensive,” said Rajesh Ravi, Institutional Analyst, Cement, HDFC Securities. Price has been set to help reduce footprint and greater cost competitiveness. As of now, there are no new levers that can drive re-rating in Shree Cement stock.”