Shree Cement’s volume growth at 9% year-on-year moderated to single digit after having remained in high double digits (20-30%) in the preceding three quarters. Sequential improvement in realisations was modest, even as production cost remained contained. Waning cost advantages and moderating volume growth may make sustenance of peak multiples difficult.
North-based players such as Shree Cement continue to enjoy the benefits of strong price increases (R 40-50/bag) taken in March 2016. Weak price trends in Q4FY16 set up a very favorable base for earnings in H2FY17, even though cost-side support from lower pet-coke prices will begin to ebb from Q3FY17 as pet-coke prices have risen to $ 84/tonne by October 2016 from $45/tonne in April 2016.
At $294/tonne, SRCM trades at 25% premium to Ultratech ($236/tonne) and significantly higher than the average enterprise value of cement companies under coverage. We have revised our earnings estimates for FY2017-19E by 6-11% to factor firm price trend as seen in the key markets of north so far, but more importantly a revision in depreciation charge for the company as well as lower effective tax rate as reflected in the results of the current quarter. We do concede that depreciation charge for Shree Cement has been volatile, and could continue to surprise going forward. Maintain sell rating with revised target price of R13,300/share (from R12,000) based on 10X EV/EBITDA on September 2018E earnings.