Shree Cement is losing its major edge over competitors

Cost inflation meant standalone earnings before interest, taxes, depreciation, and amortization (Ebitda) per tonne was the lowest in the past few quarters. 1,260. Higher sales of merchandise, where the company bought thermal coal globally and sold its subsidiary in the United Arab Emirates, also added to its cost. Therefore, its total cost per tonne reached a multi-quarter high. 4,162.

“Shree Cement has been an industry leader in terms of cost, driven by early adoption of waste heat recovery systems, petroleum coke (as kiln fuel), and split grinding models (saving freight cost). However, the industry is bullish on these aspects with Shree Cement, undermining its cost competitiveness,” analysts at Axis Securities Ltd said in a report on February 4. Against this background, any cost-cutting factors are likely to increase. There would be muted income in the absence of a reduction programme. Growth, noted the domestic brokerage house.

The entire cement sector is battling cost inflation, but for Shree Cement, a weak cost grip would mean losing its edge over competitors. This would be a bearish blow to the stock’s valuation. “For quite some time, Shree Cement has enjoyed the highest valuation multiple among listed cement stocks, mainly due to its cost leadership,” said an analyst at a domestic brokerage house, who spoke on the condition of anonymity.

The valuation gap between UltraTech Cement Ltd, which is the second costliest cement stock, and Shree Cement has narrowed in recent quarters, the analyst said. “While Shree Cement is debt free, UltraTech is on its way to be there soon. Therefore, if this trend (increased operating cost) does not reverse, UltraTech may overtake Shree on the valuation front,” he said. UltraTech aims to reduce its entire debt by FY23.

Meanwhile, as per data from Bloomberg, the consolidated FY23 EV/Ebitda multiplier for Shree Cement and UltraTech stands at 16.93x and 15.57x respectively. EV is enterprise value. Despite rich abundance, Shree Cement’s stock is a laggard. Over the past year, UltraTech shares have gained 20%, meaningfully outpacing Shree Cement, which has lost nearly 9% in the same period. Apart from cost inflation, the concern for the stock is relatively higher exposure to the former, a market facing oversupply, thus silencing the rise in cement prices in the region.