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The stock of cement major Shree Cement fell about 2.84 per cent to ₹24,045.70 on Wednesday, despite the annual (FY23) and quarterly (Q4 FY23) reports being on par with the D-street’s estimates.
Meanwhile, a majority of analysts highlighted the company’s high valuation and higher-than-expected costs as significant challenges.
ICICI Securities in its report pointed out that in the backdrop of the industry’s weak pricing power and potential industry-wide risk of aggressive capacity addition by Adani Cement, “We see little merit in arguing for a higher valuation multiple. We continue to value Shree Cement at 15x FY25E EV/EBITDA, and maintain ‘Reduce’ with target price of ₹21,534.” Likewise, IDBI Capital Equity Research has retained its “Hold” rating with target price of ₹24,406 due to rich valuation.
High input cost
The company’s input cost is a concern for analysts.
“Total cost per tonne increased 11 per cent year on year/5 per cent quarter on quarter (QoQ) to ₹4,409 vs our estimate of a 2 per cent QoQ decline owing to higher-than-expected input prices,” explained Emkay Global, assigning a ‘Hold’ rating to the stock.
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The brokerage further said that the company’s strong volume-growth guidance, focus on branding, and overall improvement in realisations/margins are some of the tailwinds.
What could also go in its favour is the company’s guidance on fuel cost.
According to the brokerage report, the company expects the fuel cost to decline to ₹2.35-2.4/Kcal, and major benefits to kick-in from Q2 FY24.
Centrum Broking, too, has tweaked its earlier projections and said, “We are now factoring in lower costs as well realisations for FY24 and FY25. As a result, our FY24 EBITDA estimate is higher by 3 per cent and FY25 estimate is lower by 5 per cent.”
However, the brokerage maintained the “Sell” rating, citing “elevated valuation multiples of 20x/17x FY24/FY25 EV/EBITDA.”
Some positives
Elara Securities’ report stood apart from the rest when it said, “We rollover to March 2025E from December 2024E; thus, we raise our TP to ₹ 28,073 from ₹ 26,099 on 18x (from 16x) FY25E EV/EBITDA.”
Though the brokerage pointed out that the company “was unable to post any major relief on power and fuel cost in Q4 FY23 due to high-cost fuel inventory, the management expects the benefits of decline in fuel prices to gradually be reflected over Q1-Q2 FY24.”
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It expected that the company’s efforts to strengthen brand equity and launch new premium products should improve realisation, while cost optimisation initiatives such as increased use of green power and alternate fuels are likely to contain cost.
“While these measures should support margin, the gradual completion of ongoing expansion would bolster volume growth,” it added.
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