The race for ‘Most Valuable Listed Indian Cement Stock’ intensifies

With a year ahead EV/Ebitda close to 20x, Shree Cement has managed to retain the top spot, at least for now. EV is short for Enterprise Value. Ebitda is short for earnings before interest, taxes, depreciation and amortization.

Bloomberg data shows UltraTech Cement is trading at a valuation multiple of around 17 times.

But with September quarter earnings mixed bag and several cost-rationalization measures from competitor UltraTech, Shree Cement’s tag of the most valuable listed Indian cement stock is at greater risk.

In the September quarter, Shree Cement’s volumes declined 3.3% year-on-year to 6.32 million tonnes, given its higher exposure to eastern India, which is facing oversupply conditions. On the volume growth front, competitors outperformed in the September quarter. Analysts say Shree Cement’s turnover is below the industry average, which suggests a marginal reduction in market share for the company.

However, the decrease in volume was offset by higher compound yields. In addition, a one-time push in operating profit was driven by the sale of power in the spot market, with Ebitda falling 11%. Analysts say Shree Cement maintained a meaningful gap in EBITDA margins over its peers (Ambuja and UltraTech) on the back of cheaper renewable energy, indirect tax incentives and higher share of logistics benefits.

“But this gap has narrowed significantly in the last one year because of extensive work on optimizing receipts and rationalization of freight costs done by peers. We believe that the share of renewable energy will increase manifold. With this the gap will further narrow and said in a report by Prabhudas Lilladher Pvt.

Apart from cost leadership, Shree Cement’s net cash position is also one of the key factors supporting its premium valuation. But even there, UltraTech is rapidly catching up; It is on a debt reduction spree and continues to strengthen its balance sheet. UltraTech’s net debt grew 6% sequentially, but declined 47% year-on-year ₹6,300 crore by September 2021. Net Debt/Ebitda stood at 0.5x in 2QFY22 from 1.3x in 2QFY21.

Analysts at Kotak Institutional Equities said, “With strong operating cash flows, we anticipate 4-6% free cash flow yield in FY 2021-24E despite growth capex and help UltraTech to become net cash positive. Huh.”

And these factors are starting to reflect in their evaluation. Analysts at IDBI Capital Pvt Ltd say Shree Cement has a valuation premium of 45% for UltraTech, as compared to an all-time high of 80% and a historical average of 40%.

Meanwhile, Shree Cement has guided to increase its capacity from 46.4mtpa to 80mtpa by 2030. Mtpa is short for million tonnes per annum. Investors should note that, unlike its earlier policy of focusing on organic expansion, Shree Cement is actively exploring inorganic opportunities to meet targeted potential. On the other hand, in the case of UltraTech, Kotak analysts say the company had leveraged for inorganic growth in the past, but given that there are no major cement assets on the block, mergers and acquisitions are not a potential risk.