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MOSL : SHREE CEMENT: Cost pressures and weak realization hurt

Shree Cement: Cost pressures and weak realization hurt

(SRCM IN, Mkt Cap USD9.3b, CMP INR21163, TP INR21510, 2% Upside, Neutral)

Announces changes in the Board's composition

• SRCM, as expected, reported a weak 2QFY23, led by higher variable costs and weak realization. EBITDA fell 42% YoY to INR5.2b (est. INR5.4b) and EBITDA/t came in at a 28-quarter low at INR701 (est. INR770), down 51% YoY and 36% QoQ). Profit fell 67% YoY to INR1.9b (est. INR2.1b).
• Changes in the Board composition: 1) Mr. B. G. Bangur will be Chairman Emeritus (earlier: Chairman); 2) Mr. H. M. Bangur will be Chairman (earlier: MD); 3) Mr. Prashant Bangur will be Vice Chairman (earlier: Joint MD); and 4) Mr. Neeraj Akhoury (former MD & CEO of ACEM/ACC) has been designated as MD for a period of five years.
• We have kept our earnings estimates largely intact. Valuations, at 17.7x FY24E EV/EBITDA, appears rich considering the narrowing of cost benefits v/s its peers. We maintain our Neutral rating on the stock, valuing it at 16x Sep'24E EV/EBITDA (from Mar'24 earlier).

Sales volume above our estimate, but realization disappoints

• Revenue/EBITDA/profit stood at INR37.8b/INR5.2b/INR1.9b, +18%/-42%/-67% YoY and 1%/3%/9% below our estimates. Sales volumes rose 18% YoY as Cement volume grew 14.5%. Realization was flat YoY, but declined by 9% QoQ (7% lower than our estimate). Lower power sales and higher clinker volumes (impact of ~1% on realization) aided pressure on realization.
• OPEX/t increased by 20% YoY, led by: 1) a 66% increase in variable costs on higher coal and petcoke prices, and 2) a 3% rise in freight cost. Employee cost/t fell 12% on higher volumes and other expense declined by 10% YoY. Higher costs led to 14pp YoY and 6pp QoQ decline in OPM to 13.8%.
• Depreciation/interest cost rose 45%/22% YoY. Higher interest cost was largely due to an increase in short-term borrowings (up INR6.9b in 1HFY23).
• Revenue grew 20% YoY in 1HFY23, backed by a 6%/14% YoY rise in blended realization/volume. OPEX/t increased by 23% YoY, which led to 30% drop in EBITDA to INR13.4b and ~12pp YoY decline in OPM to 16.8%. Profit declined by 59% YoY to INR5.1b.
• OCF in 1HFY23 declined by 26% YoY to INR7.3b due to lower profitability, which was partly offset by an improvement in working capital and lower tax outgo. FCF turned negative (INR4.6b) v/s INR2.3b in 1HFY22, due to higher capex of INR12b v/s INR7.6b in 1HFY22.