Shree Cement rating – Hold: Results were in line with expectations

Shree Cement reported in-line results for Q4FY21 with volume growth of 19% y-o-y, partly helped by the benign base the previous year. Industry peers that have reported their Q4 results so far have seen volume growth of c25% y-o-y. Shree Cement’s Ebitda margin declined by 300bps q-o-q to c30%, a tad lower than the consensus forecast of c31%. Taking into account the better-than-expected sequential rise in realisations – up 4% q-o-q — the margin performance appeared particularly weak, in our view.

The bulk of the margin miss was on account of record-high staffing and other expenses. The staffing costs were 28% higher than its previous quarterly peak in Q1FY20 while other expenses were 24% higher vs the peak in Q3FY21. Thus, it did not benefit from the strong operating leverage and reported the weakest Q4FY21 performance vs peers.

Margin pressure likely to continue: Admittedly while some of the fixed costs may see corrections in the near term post the recent COVID-19 wave, we expect the margin trend for Shree to remain relatively subdued compared with peers for FY22e. Our view is primarily driven by company’s renewed focus on gaining market share and sustaining industry leading growth. We expect realisation growth for Shree to be less than 2% vs 3% for industry in FY22e. Indeed, as evident in FY21, Shree reported volume growth of 10% vs a decline for industry while its Ebitda/tonne growth of 1% y-o-y was subpar.

We forecast a CAGR of 12% for volumes for Shree between FY21e and FY24e compared with 9% for the industry. Price increases are unlikely to offset higher input prices, which have seen further increases in recent months. Consequently, we now build in lower margins, resulting in a c3% cut to our absolute Ebitda estimates for FY22e and FY23e. For FY21e-24e, we estimate a CAGR of 14% for absolute Ebitda, in line with those of other large peers under coverage, largely driven by strong volume growth.

Retain Hold and lift TP to Rs 27,500 from Rs 27,200: The resurgence of COVID-19 remains a key risk for the near term. Our interactions with dealers suggest some moderation in sales. However, cement demand, in our view, is often sticky and should see a quick recovery as the macro environment and impact of the pandemic normalise over the year. We view Shree Cement as the best cement franchise given its higher-than-industry growth, lowest operating costs and strong return ratios vs peers. However, it is trading at 20x 1-year forward Ebitda, representing a 20% premium to its historical average, implying limited upside.