Shree Cement - Limited Scope For Cost Reduction; Valuation Expensive: Motilal Oswal

Motilal Oswal Report

Shree Cement Ltd. is one of the most cost-efficient producers in the industry, owing to its various cost reduction measures such as higher use of green energy, in-house innovation to improve plant efficiency, and a freight cost policy that involves auction for better rates.

However, while other players have also caught up on cost-reduction measures, the cost/tonne gap between Shree Cement and its peers has declined to Rs 572/tonne in FY22 (Rs 529/tonne in nine months-FY23) from Rs 838/tonne in FY18. We believe the company’s cost curve currently positions the company above its peers, leaving little room for significant cost reduction.

Shree Cement is expanding its clinker/cement capacity by 5.3 million tonnes per annum/9.5 mtpa spread over North, East, and South regions.

Shree Cement is estimated to deploy ~90% of operating cash flow for capex in FY23-25 as compared to the past three/five-year average at ~40%/~60%, which will result in lower free cash flow yield.

The stock trades at 19.7 times/16.9 times FY24E/FY25E enterprise value/Ebitda (versus its 10-year average one-year forward EV/Ebitda of 19.4 times), limiting any material upside potential.

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