Shree Cement: Nifty’s newest member is a multibagger with many ‘sell’ calls

NEW DELHI: Shares of Shree Cement have rewarded investors immensely, gaining over 1,000 per cent in the last 10 years. Its margin in FY20 so far is the industry best.

Ahead of its inclusion in Nifty50, the scrip is also among the most expensive cement stocks in the world and many brokerages have ‘sell’ ratings on it, as they feel valuations leave no margins of safety.

The cement maker, which is a market leader in North India, commands a market capitalisation of Rs 89,000 crore that exceeds the combined market value of Ambuja Cements, ACC and the Ramco Cement, and is only next to UltraTech’s Rs 1.28 lakh crore m-cap.

On Wednesday, the scrip jumped 4 per cent to Rs 24,728.85.

Brokerages said the company’s margins and return ratios might peak out in FY20. They feel that realisations may stay under pressure due to Shree Cement’s presence in oversupplied markets and higher FY20 base.

The stock will be included in Nifty50 on March 27, replacing private lender YES Bank.

HDFC Institutional Equities earlier this week downgraded the stock to ‘sell’ with a target price of Rs 19,900, suggesting a 20 per cent fall over the prevailing market price.

Centrum Broking has a ‘sell’ rating with a target of Rs 18,178 on the stock, suggesting a 26 per cent potential downside. Motilal Oswal is ‘neutral’ on the stock, but its target of Rs 22,810 for the stock suggests downside.

RoCE for the company is expected to cool off by 100-200 basis points in FY21-22. Sales ramp-up from its east, south and west regions may drive a 9 per cent volume growth over FY20-22, but volatile pricing in these markets may prevent further margin expansion, HDFC Institutional Equities said.

“We value standalone cement business at 15 times EV/Ebitda - for Shree Cement’s industry leadership in cost and return ratios and strong capex management - leading to SOTP value of Rs 19,900. As the stock currently trades at an expensive 19.8/18.4 times FY21/22 Ebitda, and at an EV of $280 per tonne, we downgrade our rating to ‘sell’,” HDFC Institutional Equities said.

IDBI Capital has also cut its rating on the stock this week to ‘reduce’ with a target of Rs 22,150, suggesting a 10 per cent potential downside.

“The company raised Rs 2,400 crore at price of Rs 19,300 in November 2019 and post the raise, stock is up 27 per cent. Given the recent run, stock is priced to perfection,” it said.

The stock has gained 1,066 per cent in the last 10 years. HM Bangur, MD at Shree Cement said that his company never expected the market would value it so much.

“We want to maintain one principle and that is to remain debt free and work within our means. There is a lot of scope for improvement in valuations and growth. Indian economy will at least be growing at 6 per cent on a long-term basis. We did a doubling of production, there is enough scope,” said he.

The company has commissioned Jharkhand (2.5 million tonnes plant) and grinding units in Odisha and Pune (6 million tonnes capacity) are expected by the first half of FY21, which will increase the cement maker’s total capacity to 46 million tonnes.

Overall, the company plans to increase capacity at 12 per cent CAGR to 80 million tonne by FY26.

Prabhudas Lilladher has recommended a ‘reduce’ rating on the stock with a target of Rs 19,500.

“We see strong downside risk to the margins due to competition from new capacities and increased likelihood of leakage on volumes coupled with widening gap between A and C category brands. Stretched valuations with EV/Ebitda of 20 times and P/E of 38 times FY22E and flattening earnings growth leave no scope for margin of safety,” it said.

For the December quarter, Shree Cement posted a 2.87 per cent rise in standalone profit at Rs 309.95 crore. The Kolkata-headquartered firm’s net revenue stood at Rs 2,848.34 crore, up 2.43 per cent over Rs 2,780.63 crore in the year-ago period.

Shree Cement and a clutch of companies were said to be in the race to buy the cement business of Emami group. But with Emami finalising deal with Nuvoco Vistas and Shree recently raising Rs 2,400 crore through qualified institutional placement, JM Financial expects the company to increase focus on organic capacity expansion plan.

“We expect the ramp-up in recently commissioned capacities to drive growth in the medium term," it said.

This brokerage has a ‘hold’ rating on the stock with a target of Rs 22,800, a potential 8 per cent downside. It values Shree Cement at 15 per cent discount to its 5-year median multiple.

Analysts are expecting three million per tonne greenfield plant in Rajasthan by Q3FY21, as it is waiting for environment clearance. The plant, brokerages said, will reduce distance by 150-200 km for markets north of Jaipur.

“Given low margins at its south-based plants, the company may look to enter Gujarat due to strong profitability and limited capacity addition. This shows the limited capacity pipeline over the next 3-4 years for Shree Cement, defying the entire purpose of recent fundraising and strong balance sheet,” Prabhudas Lilladher said.

Overall, the company has four ‘sell’ calls, nine ‘underperform’ calls and 11 ‘hold’ calls, data publicly available with Reuters suggest.

The stock also has eight ‘outperform’ and three ‘buy’ calls.