MOSL: SHREE CEMENT | Annual Report (Buy)-Expanding footprint in new regions-On capacity expansion spree for the next 2-3 years.

​Shree Cement | Annual Report: Expanding footprint in new regions; On capacity expansion spree for the next 2-3 years

(SRCM IN, Mkt Cap USD9.6b, CMP INR18480, TP INR22360, 21% Upside, Buy)

We went through Shree Cement's (SRCM) annual report for FY17. Our key takeaways:

Diversification strategy continues; adding capacity in newer markets: SRCM continues its endeavor to diversify its end markets by adding capacity in newer markets of East and South India over the next two years. It will be adding up to 6.4m tonnes in the East and 3m tonnes in the South over the next couple of years. This will reduce its dependence on the North from 100% in 2014 to less than 65% in FY20; currently, the North accounts for ~78% of SRCM’s capacity.

Aggressive capacity addition program continues: SRCM has increased capacity at a CAGR of 17% over FY12-17 by debottlenecking and diversifying into newer markets. Capacity addition far ahead of the industry has resulted in strong market share gains for SRCM. It is likely to increase capacity by ~32% over the next two years, which will result in continued trend of market share gains.

Capex cost remains lowest in the market: In FY17, SRCM increased capacity by ~14% to 29.3m tonnes. The associated capex for the expansion was INR7.6b. This translates into capex per tonne of USD32 as against the industry standard of USD50-70/tonne. Of the total capacity addition of 3.7m tonnes, 2.1m tonnes was by way of debottlenecking, which typically entails lower capex cost.

Cost leadership maintained: SRCM has been able to mitigate the impact of sharp increase in petcoke prices in FY17 by building low cost inventory and improving power consumption norm. Petcoke prices increased ~21% in FY17, while SRCM’s unitary cost of power and fuel declined by ~6%. We expect the lag impact of increase in petcoke prices to be seen in SRCM’s unitary power and fuel cost.