MOSL: SHREE CEMENT (Buy)-Capacity-led earnings growth on the cards-Valuations have moderated based on FY20E capacity
Shree Cement: Capacity-led earnings growth on the cards; Valuations have moderated based on FY20E capacity
(SRCM IN, Mkt Cap USD8.6b, CMP INR16182, TP INR18867, 17% Upside, Buy)
- Shree Cement (SRCM) is increasing its domestic capacity by ~32% over FY17-19 at an estimated capital cost of USD60/t. Acquisition of the asset in the UAE at USD76/t has also been at a significant discount and in line with the company’s long-term strategy.
- SRCM’s relatively low cost of production compared to peers has resulted in healthy margins and return ratios. As a result, it warrants premium valuations, in our view.
- We expect SRCM to deliver a better performance than industry due to 1) capacity ramp-up over FY17-19 and 2) a favorable market mix, with higher exposure to the north markets (>70%), where prices are expected to be the highest.
- Valuations have also moderated on account of ~18% correction in the stock price from its peak due to 1) market correction, 2) downward revision in its earnings estimate and 3) multiple de-rating due to capacity acquisition in the UAE.
- Valuations have moderated to USD174/t on FY20E capacity. This translates into ~25% premium to the replacement cost of USD140/t and ~14% premium to the revised bids for Binani Cements’ domestic assets.
Shree Cements is engaged in the manufacture of cement. Co.'s brands include Shree Ultra, Bangur Cement, and Rockstrong Cement. Shree Ultra is Co.'s flagship brand. This brand has two variants, Shree Ultra OPC and Shree Ultra Jung Rodhak Cement. Shree Ultra Jung Rodhak Cement has unique rust prevention properties. Bangur Cement, launched as a premium brand in the market, is designed to meet the high end market segment. Rockstrong Cement is the youngest brand. This brand has high performance and ability to withstand exceptionally harsh environment conditions.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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