Emkay Global

Shree Cement (Buy)

Target: ₹31,200

CMP: ₹27,152

Standalone Q1 EBITDA of ₹1,000 crore (+45 per cent y-o-y, consensus: ₹940 crore) and blended EBITDA/ton of ₹1,482 (+4 per cent y-o-y, -2 per cent q-o-q) were both in line with our estimates.

Shree Cement aims to achieve 80 mt capacity by 2030 (7 per cent CAGR) from 43 mt in March 2021, indicating that its goal of doubling the capacity in 5-7 years is progressing at a slower pace than its earlier guidance. Our current forecasts imply 9 per cent capacity CAGR over FY21-26 and 6.5 per cent thereafter.

We trim FY22 and FY23 EBITDA by 4-6 per cent, factoring in the higher opex/ton. We lower our target EV/EBITDA by 5 per cent to 18x (19x previously), based on a marginal dilution in RoICs from higher opex in the medium term.

The company may generate ₹7,000 crore in free cash flow (FCF) after factoring in capex of ₹6,400 crore over FY22-24. Shree Cement had an industry-leading RoIC of 30 per cent in FY21, which is expected to further expand by 700 bps to 37 per cent by FY24, driven by rising asset turnover and margins. We roll forward to September 22 from June 22, but lower our target price by 5 per cent to ₹31,200 from ₹32,750. Our target price implies a one-year forward EV/EBITDA of 18x versus 19.3x at CMP. Retain ‘Buy’, noting near-term upside may be limited. Key downside risk is overseas M&A.