CLSA upgrades Shree Cements to Outperform from Underperform rating with target price raised to Rs 23500 from Rs 21000. CLSA believes that strong volume growth drives beat for Shree Cement. Operational performance bounces back is the key reason for CLSA to upgrade the stock to outperform rating. Shree Cement reported Q2 EBITDA of Rs 10 bn (+25%) on better top line and lower costs. Volumes (+14% YoY) and profitability (Rs 1513/T, +17%) both were above estimate. Better profitability was driven by better realisations and lower costs. This highlights a strong bounce-back from an underwhelming Q1. Post the recent underperformance, CLSA believes Shree Cement’s growth potential and superior return profile justify current valuations.

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Operationally ahead higher top line key driver of the beat:

Shree Cement reported Q2 FY21 EBITDA of Rs 10 bn (+17% YoY), above estimates. Volumes rose 14% YoY (versus a mid-single-digit increase for the industry), better than estimates. Blended ASP fell 2% QoQ (above estimates) and boosted revenues further. Cement ASPs are no longer disclosed separately, yet CLSA believes the results allay concerns around Shree foregoing realisations to maintain growth.

Profitability above expectations, costs lower on higher volumes:

EBITDA/T rose 6% QoQ to Rs 1513 (+3% YoY). This is in contrast to most cement companies, which have reported sequentially lower profitability. Along with higher blended realisations, lower costs also helped margins. Power and freight cost/T fell QoQ and was below estimates. CLSA expects more colour from the management on the forward trajectory of these. Other expenses surprised negatively and had higher QoQ despite higher volumes. Overall blended cash cost/T fell 6% QoQ (-9% YoY).

PAT boosted by continued lower depreciation:

PAT was 66% above estimates on lower depreciation (-35% QoQ) and higher other income (+77% QoQ). The tax rate for the first half was 25%. CAPEX for the first half was at Rs 4 bn (FY21 Rs 10 bn). CLSA expects Shree Cement’s capacity addition to be on schedule and cement capacity to rise to 46.5 mt (current: 40.5mt) by FY21. CLSA expects the next leg of capacity adds to be announced shortly and provides visibility of sustained growth.

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Valuations fair post underperformance; upgrade to Outperform

Shree Cement is up 8% in the past three months versus cement peers/Nifty +18%/13%. Post the recent underperformance, CLSA believes Shree Cement’s growth potential and superior return profile justify current valuations. It is now trading at 17.5x FY22 EV/EBITDA in-line with the historical median. CLSA raised their FY21-23CL EBITDA by 9-12% on better volumes and profitability.