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Buy Shree Cements, target Rs 17,200: Reliance Securities

Reliance Securities has a buy call on Shree Cements (SRCM) with a target price of Rs 17,200.

The current market price of Shree Cements is Rs 15,831.80.

Time period given by the brokerage is one year when Shree Cements price can reach the defined target.

Investment rationale by the brokerage:

Healthy sales volume growth drives revenue: SRCMs sales volume grew by a healthy 15.6 per cent YoY (-19 per cent QoQ) to 5.64mnT (including clinker of 0.21mnT) owing to healthy demand environment in its key markets. Consequently, its revenue grew by 21 per cent YoY (-16 per cent QoQ) to Rs25.9bn aided by 75 per cent YoY growth in power divisions revenue. Power volume stood at 400mn units with average tariff of Rs 4.49/unit (+29 per cent YoY and +1 per cent QoQ).

Superior realisation leads to healthy operating performance: While cost pressure continued to prevail led by sustained rise in fuel prices, SRCM reported a better-than-expected operating performance due to higher-than-expected improvement (3.9 per cent QoQ) in average NSR to Rs4,268/tonne. Adjusted EBITDA stood at Rs5.73bn vs. our estimate of Rs 4.83bn, while EBITDA/tonne came at ~Rs946 vs. Rs1,133 and Rs863 in 2QFY18 and 1QFY19, respectively. Higher trade volume from Northern region (~76 per cent vs. nearly 60 per cent) led to higher realisations.

Outlook & Valuation: We believe SRCM has been moving in the right direction in its pursuit to dominate the markets by adding capacity at regular intervals, which we believe will help the Company to grow market share with strong profitability without much stress on balance sheet. Hence, its premium multiple is expected to sustain, which can be supported by thin liquidity and meagre non-institutional holdings. Recent commissioning of new capacities and near-completion of Karnataka clinker units are likely to aid SRCM to gain further traction, going forward. We reiterate our BUY recommendation on the stock with a downwardly revised Target Price of Rs 17,200 (16x FY20 EBITDA).

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