SRCM has now shifted focus on improving realisation (vs volume growth earlier). While it is adding 5.5mtpa new cement capacity in east India, it may be constrained by clinker capacity.
SRCM’s recent run-up has been strong (last 6M SRCM +27%; vs 5-17% for UT/ACC/Ambuja; and NIFTY +12%). While volume growth remains healthy and costs are easing, the rally has been driven by expectations of cement price hikes.
We believe cement is in an upcycle, but we think cement price increase may remain slow, especially after the government’s recent criticism of rising cement prices. Despite a 5% decline since this criticism, valuations at 16.4x FY21F core EBITDA and 33x FY21 P/E are expensive, in our view.
SRCM has now shifted focus on improving realisation (vs volume growth earlier). While it is adding 5.5mtpa new cement capacity in east India, it may be constrained by clinker capacity. Also, ramp-up of the 3-mtpa capacity in South will likely be slower than expected.
Overall, we expect 11% y-y volume growth for SRCM in FY20-21F (vs 15% y-y in FY19, avg. 13% y-y over last 5- years). With increased focus on premium grades, we expect SRCM’s realisation to increase 3.0-3.5% y-y (vs 2-2.5% y-y for industry) over FY20- 21F. We also expect cost inflation to ease driven by lower diesel / pet-coke prices. Driven by these, we expect blended EBITDA to improve to Rs 1,331- 1,438/tonne in FY20-21F (vs Rs 1,026/ 1,020 for FY19/last five year avg).
SRCM’s FY19 earnings were in-line. Our FY20F EPS is unchanged, while our FY21F EPS increases by 5%. We expect two-year EPS CAGR of 40%.
Our target price increases to Rs 21,500 (from Rs 18,000) and implies 4% upside. While valuations at 16.4x FY21F core-EBITDA and 33x FY21F P/E are below recent peaks, we think these are expensive. Among large-cap cement stocks, we prefer UT as its volume growth outlook and valuations are relatively better.
For more than a year, cement demand has been quite strong. For FY18, cement demand was up 8.8% y-y. As per various industry estimates, cement demand growth was higher 11-13% y-y in FY19, the first double-digit growth since FY10. While there may be near-term impact due to the recently concluded elections in 1QFY20F, overall cement demand outlook remains good, in our view, driven by affordable housing and infrastructure. Expect 11% volume growth for Shree Cement, TP Rs 21,500