Shree Cement Q2 Review: Analysts Cautious On Premium Valuation, Lower Volumes

Shree Cement Ltd.’s earnings beat estimates in the quarter ended September. Still, analysts are cautious about the the company’s expensive valuations, cost inflationary pressure and lower volumes.

The cement maker’s volumes fell 7.5% sequentially to 6.3 million tonnes in the July-September period, against the estimated 6.6 MT. Its realisations remained flat.

Shree Cement’s Ebitda per tonne declined 4.2% over the preceding quarter. But, that analysts said, fared better than peers.

Share of freight costs to net sales declined during the reported quarter, partly offsetting an increase in that of power and fuel, and other expenses.

Here’s what brokerages have to say about Shree Cement’s September-quarter results...

CLSA

• Maintains ‘underperform’, but raises target price to Rs 28,750 apiece from Rs 28,300, up 0.3% from the current market price.

• Q2 Ebitda above estimates on higher realisations and power sales.

• Blended profitability helped by higher realisations and lower unit costs.

• Capacity expansion projects announced during the quarter.

• Shree’s strong potential is fairly priced-in, per our estimates.

• The stock has been flat over the past six months versus the sector being up about 17%.

• Shree is trading at an 18.2x FY23 EV/Ebitda, a 35% premium to peers.

• Continues see Shree’s valuation as stretched.

• At current expensive valuations, any disappointment in earnings is likely to hinder stock performance.

Goldman Sachs

• Maintains ‘neutral’, cuts target price to Rs 26,600 apiece from Rs 28,200, down 7.2% from the current market price.

• Cement plus clinker volumes were below expectations, and lagged peers.

• Volume underperformance disappointing despite strong demand in north.

• Ebitda per tonne declined only Rs 60, compared to a fall of Rs 200-400 in peers.

• Cash costs were up only 3% quarter-on-quarter, power and fuel per tonne costs (up 4% QoQ), and freight/tonne (down 8% QoQ).

• FY22-FY24 Ebitda estimates decrease 3%-6%.

Citi

• Maintains ‘neutral’; cuts target price to Rs 29,450 from Rs 30,400, still up 2.7% from the current market price.

• Q2 volumes down 3% YoY, down 8% QoQ; in line with estimates.

• Capacity to rise from 43 million tonnes to 53 MT.

• Mix post expansion: north 56%, east 32%, south 6%, west 6%.

• Checks suggest that cement prices have been hiked by Rs 8-9% in north and south; hike was undertaken by about Rs10 a bag in the centre and east (about 3%) in October.

• Revises FY22/23 Ebitda estimates by +6%/-3%, incorporating higher prices and costs as well as slightly lower volumes.

Nomura

• Maintains ‘reduce, with target price at Rs 26,500 apiece, down 7.5% from the current market price.

• Q2 ahead; best set among large-cap cement.

• Q2 ahead on likely improvement in power segment.

• Ebitda ahead of Bloomberg consensus estimates, driven by better realisation and lower freight cost.

• Sequential per unit opex increase least among large-cap cement peers.

• Lower opex, better realisations aid margins.

• Ebitda per tonne decline least among peers.

• Demand likely to pick up post festive season; price hikes remain key.

• Expensive valuations and likely margin pressure in the near term.