Shree Cement A Re-Rating Candidate? Yes, Says Jefferies
Positive catalysts include entry into the southern market and expansion in the east to become a pan-India player, it says.
Renewed focus on Shree Cement Ltd.'s capacity and volume growth along with a sustained uptick in the Ebitda will likely drive further re-rating for the stock, Jefferies Financial Group Inc. has said.
The brokerage maintains a 'neutral' rating for the stock with a target price of Rs 25,750, implying a 7% downside from the current market price. This is because of the expensive valuation of the cement maker, it said in a report on Thursday after meeting the company's management.
"Valuation premium for Shree vs peers moderated in past few years as its outperformance gap narrowed, which, we believe, can again creep back if Co sustains its Industry-leading performance."
The financial services firm underscored several other factors that may help the company, including increased industry demand, premiumisation, efficiency improvements and capital expenditure plans.
Jefferies said that the top five players would see increasing dominance in the sector. "Consolidation is good for the industry and positive for pricing in the medium term, also potentially driving an upward reset in Industry's unit profitability."
The company has also taken cost-reduction initiatives, including energy efficiency, increased rail mix and marketing initiatives. It has added 700 employees who are at the customers' sites for providing technical services in various stages of construction. "Resultantly, the company is able to garner premium price for the product," Jefferies said.
The management said premiumisation implies not only better prices to customers but also better services. Through the focused approach, the premium is increased from Rs 25 to Rs 55 per bag. There are efforts towards consolidation of brands and marketing teams, according to Jefferies.
On capex, the brokerage said that the current domestic cement capacity is 49.9 million tonnes per annum and slated to increase to 56.4, 62.4 and 71 MTPA over the next three financial years respectively.
Some of the positive catalysts include entry into the southern market and expansion in the east to become a pan-India player and plans to aggressively expand capacities in the medium term via organic or inorganic route, it said.
A fight for market share or demand disappointment are the key pricing risks; foray into the south market, which has lower utilisation rates and volatile pricing; and any sharp increase in energy costs not getting passed on immediately will weigh on the company's performance, Jefferies said.
