Shree Cem Growing Well, Hold for At Least One Year
Timely expansion of capacity from cash flows, light balance sheet, expected pick up in demand in H2FY18 to keep interest alive
Shree Cement Per Tonne Analysis
meagre 5.6% year-on-year to ₹ per tonne.
In the coming quarters, a key factor that will work in favour of Shree Cement is its timely expansion. Maintaining its strategy of expanding when demand is weak, the company will expand its present capacity of 27.6 million tonnes to 40 MT by 2018-19.
As in the past, this expansion will be funded by its cash flows from operations rather than debt. This will not only keep its balance sheet light but also prepare the inventory, which will come in handy once demand picks up in the regions where it operates. This expansion will cover the northern, eastern and southern regions. As regards cement demand, the southern region is placed well in terms of increasing construction activities spurred by the formation of two new states — Andhra Pradesh and Telangana. In the eastern region, too, since the per capita cement consumption is lower than the national average, demand is expected to be robust. On a pan-India basis, cement demand is expected to pick up in the second half of the next fiscal. Shree Cement, which is known to be the lowest cost cement producer after UltraTech Cement, is expected to record superior ear nings growth. Investors would therefore, do well to hold on to the company’s stock at least for the next one year.
At Tuesday’s closing stock price of ₹ 15,360 on the Bombay Stock Exchange, the company’s enterprise value (EV) is 10.8 times the projected EBITDA for 2018-19. This is quite attractive considering its past two-year average EV/EBIDTA of 14.