Shree Cement share price: Axis Securities initiates coverage with BUY recommendation and target price of Rs 29500/Share

Shree Cement is the second-largest cement producer in India with an operating capacity of 43.4 million tonnes per annum (mntpa) and commands an estimated market share of 8%. Shree Cement enjoys a leadership position in North India with an estimated market share of 24%. It has embarked on the expansion plan to increase its capacity to 46.4 mntpa which is expected to become operational in Q4FY21 and Q1FY22. Over the years, Shree Cement has achieved a widespread footprint across India and a strong market presence in the key markets. Shree Cement share price today is Rs 27373, up Rs 416 or 1.6%.

With capacity expansion, superior control over operating costs, and improved realizations, Shree Cement is expected to report Revenue / EBITDA / APAT CAGR of 14%/13%/17% respectively over the period FY21-23E. The said growth will be driven by an estimated volume CAGR of 12% and consistent improvement in realizations at 2% over the same period. In the backdrop of healthy growth, we expect SCL to outperform industry growth over FY21-23E. Keeping this in perspective, we foresee a strong re-rating potential and value Shree Cement at 19x FY23E EV/EBITDA to arrive at target price of Rs 29500/Share.

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Shree Cement strong operating efficiency makes it one of the lowest-cost producers of cement in India. This can be attributed to the company’s timely project execution, use of low-cost power, superior product mix, sale of blended Cement, and plants located in the proximity of end-markets and raw material sources. In a commodity product like cement, prices are dictated by the market forces, demand/supply dynamics and are beyond the control of the manufacturer.

Shree Cement has 13 cement plants with 4 integrated units and 9 grinding units located across India. After establishing itself as the market leader in the Northern region, the Company gradually forayed into Eastern and Southern regions with operating units in Bihar, Jharkhand and Karnataka. To expand further, the Company is setting up a grinding unit (3 mntpa) in Maharashtra. Additionally, the Company’s focus on increasing the share of premium brands will lead to a better product mix and result in margin expansion.

Shree Cements exhibits a robust financial position with very low debt, high interest coverage ratio, and strong return ratios. While it can fund Capital expenditure for the ongoing capacity expansion through the internal accruals, it will continue to have sufficient liquidity to meet any incremental Capex requirements going forward. Axis Securities expect the capital structure of the company to remain healthy from a medium to long-term perspective.