Analyst Corner: Maintain ‘reduce’ on Shree Cement with TP of Rs 24,140

With valuation being expensive, maintain ‘Reduce’. (Representative image)

Capex announcement on expected lines: Shree Cement (SRCM) recently made two major capex announcements: i) Setting up of an integrated 3.8mtpa clinker and 3.5mtpa cement plant at Nawalgarh, Rajasthan, at a cost of Rs 35bn (greenfield). It also plans to spend Rs 5bn towards setting up 106MW solar power plants at various locations. ii) Setting up a 3mtpa (greenfield) grinding unit in Purulia, West Bengal, at a cost of Rs 7.5bn. While SRCM investors will appreciate the much-awaited capex; at CMP, we believe there is little to cheer given: i) the announcement is along expected lines; ii) benefits will accrue only in FY25; and iii) with capex cost/t being on the higher side, is estimated to be RoE-dilutive in the near term. With valuation being expensive, maintain ‘Reduce’.

SRCM on capex spree; little to cheer: While the 6.5mtpa cement and 3.8mtpa clinker announcements appear massive, at CMP, there is little to cheer given: – MD Shri HM Bangur, in a media interview on 20th August, had already hinted about this capex roll-out. The stock has already reacted, rising 18% since then. – Capex in North India is set to be completed by Q4FY24, implying benefits only in FY25. While capex in East will commission by Q4FY23, the 4mtpa clinker (announced last year) is on track to complete by Q2FY23 (known and hence priced-in). – The expansion is in line with SRCM’s intent to reach 80mtpa capacity by 2030 (as per Annual Report 2021) implying capacity CAGR of 7% – in line or slightly ahead of expected industry growth rate. SRCM has been known to grow at 1.5x the industry. – Adjusted capex cost ($96/t; Rs 7100/t) is higher than SRCM’s historical standards and in-line with other greenfield capex announcements made by peers in recent times. Again, SRCM is known for its ability to create capacities at a cost lower than industry peers. In fact, the reported capex cost of Rs 10,000/t ($135/t) appears much on the higher side and hence likely to be viewed as negative in the near term. But given the clinker surplus, we assume SRCM will add grinding units (at Rs 2.5bn/t) and have derived the adjusted capex cost of $96/t.

Outlook and valuation: Limited scope of valuation upgrade While SRCM is one of the best managed cement companies in India, it is also among the most expensive cement stock – trading at ~22x FY23E EV/EBITDA. Indeed SRCM is ‘walking the talk’ in terms of its capex announcement, but we see incremental capex as RoE-dilutive in the near term. Overall, with RoE seen stagnating around 15%, we see limited room for valuations to be revised upward. Hence, we continue to value the stock at 16x EV/EBITDA and maintain ‘REDUCE/SU’ with a TP of Rs 24,140.

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