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Shree Cement’s entry in Nifty at premium value warrants caution

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  • Stock is trading at a whopping 43 times one-year forward price-to-earnings multiple, as per Bloomberg estimates
  • Shree Cement, which will join the Nifty index next month, gained 59% in the past one year

Shree Cement
Entry into a benchmark index is a milestone event for any listed company. However, the inclusion may hold a cautionary message for Shree Cement Ltd’s investors. As pointed out earlier in this column, index inclusions tend to happen after a sharp rally in the stock, potentially capping subsequent returns.

Shree Cement, which will join the Nifty index next month, gained 59% in the past one year. It is trading at a whopping 43 times one-year forward price-to-earnings multiple, according to Bloomberg estimates. At 18 times FY21 enterprise value/Ebitda estimate, the stock is at a 40% premium to industry leader UltraTech Cement Ltd, said Motilal Oswal Financial Services Ltd. Ebitda is earnings before interest, tax, depreciation and amortization.

Several factors are going for the stock. The company has one of the best cost structures in the industry, which helps it deliver superior operating earnings. Operating profit (Ebitda) per tonne at ?1,365 is notably higher than ?1,075 at UltraTech last quarter.

Shree Cement is adding capacity of six million tonnes per annum by the end of FY21. It raised ?2,400 crore through a qualified institutional placement. So, capital expenditure is not expected to have a bearing on its leverage or return ratios.

But many fear the new capacities may dilute the operating profit metrics, undermining its premium valuations. Currently, the company is a market leader in north India. Comparatively, new capacities are coming up in western and eastern markets, where demand and pricing trends are not that favourable.

“We expect pricing growth to remain muted in East as 25% capacity expansion by various players (including Shree Cement) is lined up over the next 18 months, which could create a fight for market share,” analysts at Motilal Oswal said in a note.

The new capacities can help the company maintain volume growth. But unfavourable prices can soften margins and return ratios. “Thus, we estimate its return on capital /return on equity to marginally cool off by 100-200bps in FY21/22E,” said HDFC Securities Ltd in a note. A basis point is 0.01%.

Seen from the other side, the premium valuations reflect investors’ faith in the Shree Cement stock, particularly in its low-cost production model. While the recent December quarter results underscore this, the valuations leave no room for error.

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Concrete

CCU testbeds in Tamil Nadu

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Tamil Nadu is set to host one of India’s five national carbon capture and utilisation (CCU) testbeds, aimed at reducing CO2 emissions in the cement industry as part of the country’s 2070 net-zero goal, as per a news report. The facility will be based at UltraTech Cement’s Reddipalayam plant in Ariyalur, supported by IIT Madras and BITS Pilani. Backed by the Department of Science and Technology (DST), the project will pilot an oxygen-enriched kiln capable of capturing up to two tonnes of CO2 per day for conversion into concrete products. Additional testbeds are planned in Rajasthan, Odisha, and Andhra Pradesh, involving companies like JK Cement and Dalmia Cement. Union Minister Jitendra Singh confirmed that funding approvals are underway, with full implementation expected in 2025.

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Concrete

JSW Cement gears up for IPO

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JSW Cement has set the price range for its upcoming initial public offering(IPO) at US$1.58 to US$1.67 per share, aiming to raise approximately US$409 million. As reported in the news, around US$91 million from the proceeds will be directed towards partially financing a new integrated cement plant in Nagaur, Rajasthan. Additionally, the company plans to utilise US$59.2 million to repay or prepay existing debts. The remaining capital will be allocated for general corporate purposes.

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Concrete

Cement industry to gain from new infrastructure spending

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As per a news report, Karan Adani, ACC Chair, has said that he expects the cement industry to benefit from the an anticipated US$2.2tn in new public infrastructure spending between 2025 and 2030. In a statement he said that ACC has crossed the 100Mt/yr cement capacity milestone in April 2025, propelling the company to get closer to its ambitious 140Mt/yr target by the 2028 financial year. The company’s capacity corresponds to 15 per cent of an all-India installed capacity of 686Mt/yr.

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