The entire cement industry is chasing volumes, but Shree Cement Ltd is going against the tide. Its strategy of prioritizing value over volumes in a seasonally weak September quarter (Q2FY25) has helped contain the drop in realizations.
At ₹4,447, realization per tonne was sequentially flat in Q2 versus a fall for the industry, the management said in its earnings call. A higher focus on premium product sales (15% in Q2 versus 9% in Q1), a lower share of non-trade sales, and avoiding low-priced markets also helped.
On the flipside, sales volume fell 7% year-on-year to an eight-quarter low of 7.6 million tonne, lagging larger pan-India peers and the industry. This indicates market share loss for Shree Cement in key markets. Thus, Ebitda at ₹593 crore missed analysts’ estimates. Q2 capacity utilization was around 56%. The management expects demand to pick up in H2FY25, aided by higher spends on infrastructure projects.
However, the current strategy contrasts the market share gain strategy adopted by the company in the last quarter, pointed out Kotak Institutional Equities. “We believe that additional capacities of about 15 mtpa (million tonnes per annum) to be commissioned over the next six-nine months by Shree Cement place a question mark on the sustenance of the value over volume strategy,” said the Kotak report on 11 November. Plus, reinstating some of the previous brands, such as Roofon and Shree Jungrodhak has led to uncertainties over the company’s marketing strategies.
Capacity expansions are spread across the north, east and south markets, helping Shree Cement diversify its geographical presence. These are expected to be commissioned by Q1FY26. Shree Cement has reiterated its capacity target of 80 mtpa by FY28 from 56.4 mtpa currently. Despite capacity expansions, this strategic move of focusing on premiumization is feared to curtail volume growth. Also, unlike some large competitors, Shree Cement is prioritizing organic growth over inorganic for capacity expansions through prudent capital allocation. A worry is that the slow ramp-up of organic capacity may lead to lower volume growth than peers.
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Shree Cement stock hit a new 52-week low of ₹23,500 on Tuesday. In 2024 so far, it is down 16% versus an increase in Nifty50 index, UltraTech Cement Ltd and ACC Ltd shares.
The stock trades at a 16x estimated FY26 EV/Ebitda (enterprise value to earnings before interest, taxes, depreciation, and amortization), showed Bloomberg data, a discount to its long-term average of about 21x. The underperformance could persist in the near term given the risk of further market share loss and potential cut in rating in multiples.
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