Shree Cement loses some ground to Ultratech in valuation contest


MUMBAI: Shree Cement Ltd reported stellar earnings for the December quarter, exceeding analysts’ estimates on many parameters. A 15% year-on-year (y-o-y) volume growth was ahead of the Street’s estimates of 11-12% rise. Although Shree Cement’s earnings were better than Street’s estimates, close competitor, Ultratech Cement Ltd also posted impressive results. Ultratech’s volumes grew 14% y-o-y in Q3FY21.

Also, a key highlight of Ultratech Cement’s earnings announcement was its target to become net debt-free by FY23. Ultratech’s sharpened focus on debt repayment has, among other things, helped the stock bridge the gap with Shree Cements, which is the most expensive listed cement stock. In the past two months, Ultratech shares have risen around 24% compared to a mere 4% rise in shares of Shree Cements.

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Analysts at domestic brokerage IDBI Capital Ltd point out that Shree’s valuation premium to Ultratech has narrowed to 54% from the highs of 80%.

Shree’s cost leadership, timely capacity additions, and debt-free status have contributed to its rich valuation multiple. Secondly, a key catalyst for the Shree Cement stock has been its massive expansion plan. But the recent delay in the commissioning of some units has got analysts a bit worried.

“While the management has guided it will double capacity to 80mtpa by FY27, execution has been slower than anticipated, with only one expansion (of 4mpta) having been announced in East. Therefore, we expect the cash pile to grow further, diluting RoE by 200bps to 15% over FY21–23E,” analysts at Motilal Oswal Financial Services Ltd said in a report on 1 February. One basis point is one hundereth of a percentage point. RoE is short for return on equity.

In a post earnings conference call, Shree Cement’s management said the company’s grinding units in Maharashtra and Odisha are expected to be commissioned in 4QFY21. It had guided for a December 2020 commissioning.

Many cement companies, including Ultratech, have announced expansion plans for eastern India. Although demand in the region is recovering, analysts caution that it is going to be a fight for market share at the expense of margins. Further, the ongoing probe into alleged cartelisation by the Competition Commission of India would keep cement makers from taking steep hikes despite cost pressure. In this backdrop, Shree Cement’s valuations are making analysts uncomfortable.

“We remain cautious on near-term cement prices given the regulatory overhang. Moreover, costs are most likely to rise for power, fuel and freight. We believe Shree’s sector-leading returns are fairly factored-into its valuation. While the valuation differential to peers has partly bridged, at a 17.5 times FY22 EV/Ebitda, it still looks demanding despite higher returns,” foreign research house CLSA said in a report on 1 February. EV stands for enterprise value; Ebitda stands for earnings before interest, tax, depreciation and amortisation.

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