Shree Cement SHCM.

NS SRCM IN

EQUITY: CONSTRUCTION MATERIALS

Good run limits upside; downgrade to Neutral Global Markets Research

12 June 2019
Earnings outlook remains good, but valuations are
Rating
becoming expensive; prefer UT Down from Buy Neutral
Target Price
We believe cement is in upcycle, but upside limited after sharp run-up Increased from 18000 INR 21500
SRCM’s recent run-up has been strong (last 6M SRCM +27%; vs 5-17% for
Closing price
UT/ACC/Ambuja; and NIFTY +12%). While volume growth remains healthy 11 June 2019 INR 20782
and costs are easing, the rally has been driven by expectations of cement
price hikes. We believe cement is in an upcycle, but we think cement price Potential upside +3.5%
increase may remain slow, especially after the government’s recent criticism
of rising cement prices. Despite a 5% decline since this criticism, valuations at
16.4x FY21F core EBITDA and 33x FY21 P/E are expensive, in our view. Anchor themes
We believe that cement is in an
Focus on realisation over volumes now upcycle and demand has been
SRCM has now shifted focus on improving realisation (vs volume growth strong. After delays, price hikes
earlier). While it is adding 5.5mtpa new cement capacity in East India, it may began recently; but with the
be constrained by clinker capacity. Also, ramp-up of the 3-mtpa capacity in government criticising the hikes,
further increases may be muted.
South will likely be slower than expected. Overall, we expect 11% y-y volume
We assume modest 2.0-2.5%
growth for SRCM in FY20-21F (vs 15% y-y in FY19, avg. 13% y-y over last 5-
price hikes in FY20-21F.
years). With increased focus on premium grades, we expect SRCM’s
Valuations are not cheap. In
realisation to increase 3.0-3.5% y-y (vs 2-2.5% y-y for industry) over FY20- cement, UT is now our only Buy.
21F. We also expect cost inflation to ease driven by lower diesel / pet-coke
prices. Driven by these, we expect blended EBITDA to improve to INR1,331- Nomura vs consensus
1,438/ton in FY20-21F (vs INR1,026/1,020 for FY19/last five year avg.)
Our FY20-21F earnings are in
Valuations: Raise TP to INR21,500, but Downgrade to Neutral line with consensus while our TP
SRCM’s FY19 earnings were in-line. Our FY20F EPS is unchanged, while our is 9% ahead.
FY21F EPS increases by 5%. We expect two-year EPS CAGR of 40%. We
now value SRCM on 17x blended EBITDA (earlier 17x for cement, 8x for Research analysts
power; blended 16.3x) and roll-forward to FY21F (earlier avg. FY20-21F). Our
TP increases to INR21,500 (from INR18,000) and implies 4% upside. While India Construction Materials
valuations at 16.4x FY21F core-EBITDA and 33x FY21F P/E are below recent Anil Sharma - NFASL
peaks, we think these are expensive. Among large-cap cement stocks, we [Link].1@[Link]
+91 22 4037 4338
prefer UT as its volume growth outlook and valuations are relatively better.
Aditya Bansal - NFASL
aditya.bansal1@[Link]
Year-end 18 Mar FY18 FY19F FY20F FY21F +91 22 40374194
Currency (INR) Actual Old New Old New Old New

Revenue (mn) 98,331 116,271 117,220 135,396 134,212 152,634 153,353

Reported net profit (mn) 13,842 9,370 9,511 17,706 17,651 21,196 22,193
Normalised net profit (mn) 13,842 11,150 11,292 17,706 17,651 21,196 22,193
FD normalised EPS 397.33 320.07 324.13 508.24 506.67 608.44 637.04
FD norm. EPS growth (%) 3.4 -19.4 -18.4 58.8 56.3 19.7 25.7
FD normalised P/E (x) 52.3 N/A 64.1 N/A 41.0 N/A 32.6
EV/EBITDA (x) 30.6 N/A 28.2 N/A 19.6 N/A 16.1
Price/book (x) 8.1 N/A 7.5 N/A 6.5 N/A 5.5
Dividend yield (%) 0.2 N/A 0.3 N/A 0.5 N/A 0.6
ROE (%) 16.7 10.0 10.3 16.6 17.0 17.1 18.3
Net debt/equity (%) 36.8 24.9 25.7 14.9 18.7 2.5 10.5
Source: Company data, Nomura estimates

Key company data: See next page for company data and detailed price/index chart. Production Complete: 2019-06-12 15:34 UTC

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Shree Cement 12 June 2019

Key data on Shree Cement

Relative performance chart Cashflow statement (INRmn)
Year-end 18 Mar FY17 FY18 FY19F FY20F FY21F
EBITDA 25,132 24,728 26,528 38,073 45,846
Change in working capital 3,857 -1,905 -6,486 -2,232 -4,875
Other operating cashflow -6,972 -4,036 3,703 -2,575 -3,148
Cashflow from operations 22,017 18,788 23,745 33,266 37,823
Capital expenditure -12,963 -25,278 -19,721 -16,438 -16,770
Free cashflow 9,054 -6,491 4,024 16,828 21,053
Reduction in investments -11,576 -18,365 7,869 -10,000 -10,000
Net acquisitions 0 0 0 0 0
Dec in other LT assets 0 0 0 0
Inc in other LT liabilities 0 0 0 0
Adjustments 4,060 7,696 866 910 955
CF after investing acts 1,538 -17,160 12,759 7,738 12,009
Source: Thomson Reuters, Nomura research Cash dividends -4,846 -1,843 -2,306 -4,249 -5,343
Equity issue 0 0 0 0 0
Notes: Debt issue 4,455 20,353 -6,170 -891 -808
Convertible debt issue 0 0 0 0 0
Others -2,867 -1,251 -2,414 313 381
CF from financial acts -3,258 17,259 -10,890 -4,827 -5,770
Performance Net cashflow -1,720 99 1,869 2,911 6,239
(%) 1M 3M 12M Beginning cash 2,830 1,110 1,209 3,078 5,989
Absolute (INR) 9.5 15.6 24.2 M cap (USDmn) 10,427.0 Ending cash 1,110 1,209 3,078 5,989 12,228
Absolute (USD) 10.4 16.4 20.6 Free float (%) 35.2 Ending net debt 11,815 32,731 24,692 20,890 13,844
Rel to NIFTY50 3.4 8.5 13.3 3-mth ADT (USDmn) 8.5
Balance sheet (INRmn)
Income statement (INRmn) As at 18 Mar FY17 FY18 FY19F FY20F FY21F
Year-end 18 Mar FY17 FY18 FY19F FY20F FY21F Cash & equivalents 1,110 1,209 3,078 5,989 12,228
Revenue 85,751 98,331 117,220 134,212 153,353 Marketable securities 40,426 54,343 44,439 54,439 64,439
Cost of goods sold -26,105 -34,924 -44,527 -46,893 -52,820 Accounts receivable 3,351 4,593 7,324 8,413 10,131
Gross profit 59,646 63,407 72,693 87,319 100,533 Inventories 13,145 15,690 15,891 16,845 18,837
SG&A -46,661 -47,673 -60,081 -65,165 -73,345 Other current assets 9,109 12,888 13,816 14,454 16,558
Employee share expense 0 0 0 0 0 Total current assets 67,141 88,723 84,547 100,140 122,192
Operating profit 12,985 15,734 12,611 22,154 27,188 LT investments 0 0 0 0 0
EBITDA 25,132 24,728 26,528 38,073 45,846 Fixed assets 33,096 50,163 55,968 56,486 54,598
Depreciation -12,147 -8,994 -13,917 -15,919 -18,658 Goodwill 0 0 0 0 0
Amortisation 0 0 0 0 0 Other intangible assets 0 0 0 0 0
EBIT 12,985 15,734 12,611 22,154 27,188 Other LT assets 11,424 12,532 11,418 11,418 11,418
Net interest expense -1,294 -1,353 -2,470 -2,187 -2,119 Total assets 111,661 151,418 151,933 168,044 188,208
Associates & JCEs 0 0 0 0 0 Short-term debt 7,737 11,859 4,680 3,789 2,981
Other income 3,618 3,891 2,454 3,258 4,133 Accounts payable 3,517 7,273 4,508 4,779 5,344
Earnings before tax 15,308 18,272 12,596 23,225 29,201 Other current liabilities 8,636 10,540 10,679 10,858 11,232
Income tax -1,917 -4,430 -1,304 -5,574 -7,008 Total current liabilities 19,890 29,671 19,867 19,426 19,557
Net profit after tax 13,391 13,842 11,292 17,651 22,193 Long-term debt 5,187 22,081 23,090 23,090 23,090
Minority interests Convertible debt 0 0 0 0 0
Other items Other LT liabilities 9,602 10,697 13,002 13,652 14,334
Preferred dividends Total liabilities 34,680 62,450 55,959 56,168 56,982
Normalised NPAT 13,391 13,842 11,292 17,651 22,193 Minority interest 0 0 0 0 0
Extraordinary items 0 0 -1,781 0 0 Preferred stock 0 0 0 0 0
Reported NPAT 13,391 13,842 9,511 17,651 22,193 Common stock 348 348 348 348 348
Dividends -5,871 -2,097 -2,516 -4,249 -5,343 Retained earnings 76,633 88,620 95,626 111,527 130,878
Transfer to reserves 7,521 11,745 6,995 13,402 16,850 Proposed dividends 0 0 0 0 0
Valuations and ratios Other equity and reserves 0 0 0 0 0
Reported P/E (x) 54.1 52.3 76.1 41.0 32.6 Total shareholders' equity 76,981 88,968 95,974 111,876 131,226
Normalised P/E (x) 54.1 52.3 64.1 41.0 32.6 Total equity & liabilities 111,661 151,418 151,933 168,044 188,208
FD normalised P/E (x) 54.1 52.3 64.1 41.0 32.6
Dividend yield (%) 0.7 0.2 0.3 0.5 0.6 Liquidity (x)
Price/cashflow (x) 32.9 38.5 30.5 21.8 19.1 Current ratio 3.38 2.99 4.26 5.15 6.25
Price/book (x) 9.4 8.1 7.5 6.5 5.5 Interest cover 10.0 11.6 5.1 10.1 12.8
EV/EBITDA (x) 29.3 30.6 28.2 19.6 16.1 Leverage
EV/EBIT (x) 56.7 48.1 59.4 33.6 27.1 Net debt/EBITDA (x) 0.47 1.32 0.93 0.55 0.30
Gross margin (%) 69.6 64.5 62.0 65.1 65.6 Net debt/equity (%) 15.3 36.8 25.7 18.7 10.5
EBITDA margin (%) 29.3 25.1 22.6 28.4 29.9
EBIT margin (%) 15.1 16.0 10.8 16.5 17.7 Per share
Net margin (%) 15.6 14.1 8.1 13.2 14.5 Reported EPS (INR) 384.39 397.33 273.00 506.67 637.04
Effective tax rate (%) 12.5 24.2 10.4 24.0 24.0 Norm EPS (INR) 384.39 397.33 324.13 506.67 637.04
Dividend payout (%) 43.8 15.1 26.5 24.1 24.1 FD norm EPS (INR) 384.39 397.33 324.13 506.67 637.04
ROE (%) 19.3 16.7 10.3 17.0 18.3 BVPS (INR) 2,209.75 2,553.83 2,754.92 3,211.38 3,766.83
ROA (pretax %) 13.3 12.1 8.4 14.3 16.1 DPS (INR) 140.00 50.00 60.00 101.33 127.41
Growth (%) Activity (days)
Revenue 51.4 14.7 19.2 14.5 14.3 Days receivable 14.4 14.7 18.6 21.5 22.1
EBITDA 79.3 -1.6 7.3 43.5 20.4 Days inventory 148.9 150.7 129.4 127.7 123.3
Normalised EPS 192.9 3.4 -18.4 56.3 25.7 Days payable 42.6 56.4 48.3 36.2 35.0
Normalised FDEPS 192.9 3.4 -18.4 56.3 25.7 Cash cycle 120.6 109.0 99.7 113.0 110.4
Source: Company data, Nomura estimates Source: Company data, Nomura estimates

2
Nomura | Shree Cement 12 June 2019

We believe cement is in an upcycle

For more than a year, cement demand has been quite strong. For FY18, cement
demand was up 8.8% y-y. As per various industry estimates, cement demand growth
was higher 11-13% y-y in FY19, the first double-digit growth since FY10.
While there may be near-term impact due to the recently concluded elections in
1QFY20F, overall cement demand outlook remains good, in our view, driven by
affordable housing and infrastructure. With a strong mandate to NDA (National
Democratic Alliance) again, we think outlook for cement sector has now further
improved.
4Q cement capacity utilisation at 78% was the highest in the last seven years. With
utilisation increasing further, the industry’s ability to raise prices should increase, we
believe.
For the cement industry, we assume 2-2.5% y-y price increase in FY20-21F.

Fig. 1: Cement demand grew~12% y-y in FY19F Fig. 2: Cement demand has remained strong
After the recent lows in FY17 (impact of currency demonetisation), the Demand has been strong since end-2017. While there has been some
demand recovered strongly in FY18, and was likely stronger in FY19F moderation recently, we believe this is due to the base effect. While we
are optimistic on demand outlook, it may be soft in 1Q due to elections.
FY19F 12% 25%
FY18 8.8% 20%
-0.8% FY17
15%
FY16 6.4%
FY15 3.0% 10%
FY14 1.7% 5%
FY13 3.4% 0%
FY12 6.6%
-5%
FY11 6.7%
FY10 10.8% -10%
FY09 8.5% -15%
FY08 10.1% -20%
FY07
Jul-16

Jul-17

Jul-18
11.5%
Jan-16

Apr-16

Oct-16

Jan-17

Apr-17

Oct-17

Jan-18

Apr-18

Oct-18

Jan-19

Apr-19
-5.0% 0.0% 5.0% 10.0% 15.0%

Source: Company data, Nomura research Source: Ministry of Commerce, Nomura research

Fig. 3: Industry volume growth and capacity utilisation Fig. 4: Cement prices have started to increase
4QFY19 cement capacity utilisation was the highest in last seven years Most regions have seen price increases, with the highest increases in
Capacity utilisation Industry growth (RHS) South and West. While there has likely been some roll-back, still we think
100% 16% there is an uptrend in prices.
15% 14% 14%
12% 12% 14% (INR/bag) North West East
90% 400
10% 12% South Central
78% 10% 380
80% 75% 74%
6% 70% 8% 360
70% 67% 66% 66% 6% 340
60% 4%
60% 320
3%
2%
300
50% 0%
280
1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

Jul-18
Jan-18

Mar-18
Apr-18

Jun-18

Oct-18
Nov-18
Dec-18
Jan-19
Aug-18
Sep-18

Mar-19
Apr-19
Feb-18

May-18

Feb-19

May-19

Source: Company data, Nomura research Source: Crisil, Nomura research

3
Nomura | Shree Cement 12 June 2019

Peak of cost inflation also seems behind

In our view, the peak of cost inflation seen in FY19 is behind us now. Driven by the
decline in oil prices, prices of pet-coke/coal/diesel fell and the impact was seen in 4Q.
From the beginning of year, oil prices have increased. However, we note that:
• Diesel retail prices have not increased much. This was likely due to oil marketing
companies (OMCs) not taking the price increases before and during general election.
• Similarly, both coal and pet-coke prices have remained softer compared to oil price
increases.
In recent weeks, oil prices have corrected driven by a weak oil demand outlook, the US-
China trade dispute, and higher-than-expected oil/product stocks in US. With weaker oil
prices, we think costs pressure could ease further for cement companies.

Fig. 5: Brent oil prices trend Fig. 6: Diesel retail price trend
While average Brent oil prices are up 11% q-q so far in 1QFY20, oil prices Domestic retail diesel prices have not increased this year, as OMCs likely
have declined sharply in the past few days shied away from price hikes ahead of the elections. With oil prices
90 weakening now, diesel prices have also declined recently. We think
(USD/bbl) fuel/freight costs will remain benign in 2019.
80 (INR/L)
80
70
75
60

50 70

40 65

30
60
20
55
Oct-15

Oct-16

Oct-17

Oct-18
Dec-15
Feb-16

Aug-16

Dec-16
Feb-17

Aug-17

Dec-17
Feb-18

Aug-18

Dec-18
Feb-19
Apr-16
Jun-16

Apr-17
Jun-17

Apr-18
Jun-18

Apr-19
Jun-19

Jan-18

Jun-18
Jul-18
Aug-18
Sep-18

Jan-19

Jun-19
Nov-18
Dec-18
Feb-18
Mar-18

Oct-18
Apr-18

Feb-19
May-18

Mar-19
Apr-19
May-19
Source: Bloomberg, Nomura research Source: Indian Oil, Nomura research

Fig. 7: Imported coal price trend Fig. 8: Domestic pet-coke price trend
Avg. coal prices have declined 7% q-q so far in 1QFY20 Avg. domestic pet-coke price has declined 13% q-q in 1Q
(USD/T) (INR/tonne)
110 12000

11500
105
11000
100
10500
95
10000
90
9500
85 9000

80 8500
Jul-18

Oct-18
Jan-18

Apr-18

Jun-18

Aug-18
Sep-18

Nov-18
Dec-18
Jan-19

Apr-19
Feb-18
Mar-18

May-18

Feb-19
Mar-19

May-19

Jul-18

Oct-18
Jan-18

Apr-18

Jun-18

Aug-18
Sep-18

Nov-18
Dec-18
Jan-19

Apr-19

Jun-19
Feb-18
Mar-18

May-18

Feb-19
Mar-19

May-19

Source: Bloomberg, Nomura research Source: Industry reports, Nomura research, Note: prices ex-yard Jamnagar

4
Nomura | Shree Cement 12 June 2019

Focus now on realisation vs volumes

In end-2018, SRCM started a new 3-mtpa integrated cement plant at Gulbarga in
Karnataka. This is SRCM’s first cement capacity in the South Indian market. Also, over
the next few months SRCM is expected to start new 5.5mtpa cement capacity in East
India. Thus, compared to 34.9mtpa capacity at end-FY18, SRCM would have expanded
capacity by nearly 8.5mtpa or 24%.
However, compared to earlier trends, we expect the ramp-up of new capacities to be
slower. The South Indian market has seen significant overcapacities in recent years, and
capacity utilisations are typically the lowest among all regions. As it strives to increase
market share in South India, we think ramp-up of Gulbarga capacity will be slower.
Also, in our view, ramp-up of the upcoming 5.5mtpa cement capacity will be constrained
by clinker capacity. We note that following the completion of upcoming capacity, SRCM’s
cement grinding capacity will be about 14mtpa. This compares with clinker capacity of
only ~5.4mtpa. This implies cement to clinker ratio of 2.6x. Typically East Indian market
has shown higher levels of cement to clinker ratio. For example, compared to overall
ratio of 1.5x, SRCM has indicated that this ratio is about 1.8x for its East India capacity.
In our view, for increased utilisation of new grinding capacity, new clinker capacity is
required. SRCM has plans to increase clinker capacity at its Chhattisgarh unit by
2.6mtpa; but the final investment decision is not taken yet. Even if this decision is taken
in the next few months, we think new capacity may come only toward end-FY22.

Fig. 9: Cement capacity ramp-up plans

(mtpa) Timeline FY18 FY19 FY20F FY21F

Beginning 29.3 34.9 37.9 43.4
Bihar Feb-18 2.0
Sri Ganganagar Feb-18 3.6
Karnataka integrated plant Dec-18 3.0
Seraikela- Kharsawan, Jharkhand Jun-19 2.5
Athagarh, Cuttak, Odisha Sep-19 3.0
Pune Mar-21 2.0
Year end-capacity 34.9 37.9 43.4 45.4
Year-end region wise breakdown
North 26.3 26.3 26.3 26.3
East 8.6 8.6 14.1 14.1
South 3.0 3.0 3.0
West 2.0
Total 34.9 37.9 43.4 45.4
Source: Company data, Nomura research

Fig. 10: SRCM – Likely clinker capacity

We assume 2-3% annual capacity increase drive by de-bottlenecking
FY18 FY19 FY20F FY21F
North 15.4 18.0 18.5 19.0
East 5.2 5.2 5.4 5.6
South * 2.4 2.5 2.5
Total 20.6 25.6 26.4 27.2
Source: Company data; Nomura research; Note: Gulbarga capacity in South will also serve the upcoming new cement
grinding capacity at Pune in West India.

5
Nomura | Shree Cement 12 June 2019

We assume ~11% y-y volume growth and 3.0-3.5% y-y increase in realisations
Driven by our expectation of slower ramp-up of new capacities, we assume lower volume
growth of ~11% y-y over FY20-21F. This compares with nearly 13% volume CAGR that
SRCM has reported over the last decade.
While volume growth will likely be lower, we think SRCM could surprise on realisations.
Recently, SRCM has indicated that it will focus more on realisation (vs earlier focus on
volumes), by increasing retail share and also more focus on premium grades. Thus,
compared to 2.0-2.5% y-y of price increase for the industry, we assume higher price
realisation of 3.0-3.5% y-y for SRCM.

Earnings estimate revisions

We incorporate FY19 actuals, and also revise our volume growth, cement price
realisation assumptions.
• We now forecast volume growth of ~11% y-y for FY20-21F (12-16% earlier). We now
assume SRCM’s cement realisation to increase by 3.0-3.5% y-y in FY20-21F. We
have also assumed marginal reduction in per unit costs by 0.6-0.7%.
• With higher price realisation and marginally lower per unit costs, our EBITDA/tonne
estimates increase to INR1,331 in FY20F and INR1,438 in FY21F (from INR1,220-
1,249/tonne earlier).
While EBITDA/ton estimates seem higher vs INR1,026/ton in FY19, we note that
SRCM had reported per unit EBITDA of INR1,161/ton in 4Q, despite its cement price
realisations declining 2% q-q. With price increase benefits likely visible from 1QFY20F
and fuel costs easing further, we think realised margins should improve materially from
4Q levels.
• Due to lower volume growth assumption offset by higher realisations, our earnings
changes are modest, with FY20F EPS unchanged, and FY21F increasing by 5%.
• Our FY20-21F EPS estimates are in-line with Bloomberg consensus.
After an 18% decline in FY19, we expect strong earnings rebound of 56% in FY20F,
followed by further 26% increase in FY21F, with two-year CAGR of 40%.
We highlight that earnings have high sensitivity to cement price assumption. On our
estimates a 1% change in cement price, changes FY20-21F per ton EBITDA estimate by
INR42-43 (3%) and EPS by nearly 5%. (Fig. 13)

Fig. 11: SRCM – Key assumptions

FY14 FY15 FY16* FY17 FY18 FY19 FY20F FY21F

Cement production (MT) 14.2 15.9 14.1 20.3 22.2 25.1 27.9 31.3
Utilisation (%) 92% 77% 76% 74% 69% 69% 69% 70%
Sales (MT) 14.3 16.2 14.2 20.6 22.5 25.9 28.6 31.9
Cement realisation (INR/MT) 3,680 3,556 3,491 3,887 4,172 4,223 4,366 4,491
Total EBITDA (INR/MT) 975 831 927 1,221 1,097 1,026 1,331 1,438
Note: FY16 is 9-month period; Source: Company data, Nomura estimates

6
Nomura | Shree Cement 12 June 2019

Fig. 12: SRCM – Per-tonne earnings model

P/L (INR/tonne) FY14 FY15 FY16 FY17 FY18 FY19 FY20F FY21F
Cement revenue 3,680 3,556 3,491 3,887 4,178 4,223 4,366 4,491
Other revenue 451 437 418 278 192 310 325 318
Raw material costs 295 293 324 293 317 334 342 346
Salary costs 277 282 256 261 261 262 249 234
Power and fuel costs 967 977 794 702 880 1,061 993 1,007
Freight 835 863 802 910 1,122 1,107 1,030 1,030
Other expenses 781 746 807 779 691 742 746 754
Cement EBITDA 925 743 759 1,074 935 804 1,096 1,202
Total EBITDA 975 831 927 1,221 1,099 1,026 1,331 1,438
Depreciation 386 572 638 590 400 538 556 585
EBIT 589 259 289 631 699 488 774 853
Finance costs 91 75 53 63 60 96 76 66
Other income 130 85 84 176 173 95 114 130
PBT 628 270 321 744 812 487 812 916
Provision for Tax 20 (16) (0) 93 197 50 195 220
PAT 552 264 319 650 615 368 617 696
Source: Company data, Nomura estimates

Fig. 13: SRCM – Sensitivity analysis

For each 1% change in cement prices, EBITDA/EPS changes by 3%/5% respectively
FY20F FY21F
Base EPS (INR) 506.7 637.0
Base EBITDA/ton (INR) 1,331 1,438
Cem ent realisation sensitivity
Base case (INR/bag) 218 225
Impact of 1% higher price
- EPS (INR) 26.5 5% 31.2 5%
- EBITDA (INR/ton) 41.9 3% 43.1 3%
Source: Nomura estimates

7
Nomura | Shree Cement 12 June 2019

Valuations
We continue to use the EV/EBITDA valuation methodology to value SRCM but roll
forward our valuations to March-21 (from Sept-20F).
We now value SRCM on blended EV/EBITDA multiple of 17x (vs earlier 17x for cement
segment, 8x for power segment, and blended 16.3x multiple).
We continue to believe that the cement sector is in an upcycle. But, we also highlight that
SRCM’s recent performance has been strongest relative to its large-cap peers (last 6M
SRCM +27%; vs 5-17% for UT/ACC/Ambuja; and NIFTY +12%). After this strong run, we
note that the stock already trades at ~17x FY21F core EBITDA. While in recent years,
SRCM has traded at higher multiples of even 22-23x EV/EBITDA, we note that there
could be concerns as SRCM’s volume growth is likely to moderate.
We raise our TP to INR21,500 (from INR18,000), but downgrade to Neutral.
Among the large cap Indian cement names, we prefer Ultratech Cement (UTCEM IN,
Buy).
Key upside risks to our Neutral view include higher-than-expected cement realisation
increase, higher volume growth and/or higher cost reduction.
Key downside risks to our Neutral view include weak cement demand, lower cement
prices and increases in operating costs.

Fig. 14: We use an EV/EBITDA-based valuation methodology to value SRCM

INR mn FY21F
Target EV/EBITDA (x) 17.0
Core - EBITDA (FY21F) 42,118
EV [A] 716,003
Net Debt (FY20F) [B] -33,548
Equity value (A-B) 749,551
No of shares (mn x) 34.8
1-yr forward fair value (INR) 21,516
1-yr forward target price (INR) 21,500
Source: Nomura estimates

Fig. 15: 1-year forward EV/EBITDA chart

35.0 1yr rolling forward EV/EBITDA multiple

Average EV/EBITDA multiple
30.0 +1SD
-1SD

25.0

20.0

15.0

10.0

5.0

0.0
Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19
Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Source: Nomura estimates

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Nomura | Shree Cement 12 June 2019

Fig. 16: Regional cement valuation comparison

[Link] P/E P/BV (x) EV/EBITDA ROE (%)

Tickers Rating (USDbn) FY19 FY20F FY21F FY19 FY20F FY21F FY19 FY20F FY21F FY19 FY20F FY21F
India ‐ Large cap
UltraTech UTCEM IN Buy      18.1    51.3    32.1    24.6      4.5      3.6      3.2    23.3    15.4    12.3 9.1 12.7 13.7
Shree Cement SRCM IN Neutral      10.4    64.1    41.0    32.6      7.5      6.5      5.5    28.2    19.6    16.1 10.3 17.0 18.3
Ambuja ACEM IN Neutral         6.4    21.7    19.8    18.4      1.8      1.7      1.6      8.5      7.6      6.8 8.8 9.0 9.0
ACC ACC IN Neutral         4.3    21.6    18.3    16.7      2.6      2.3      2.1    10.0      8.4      7.4 12.5 13.4 13.3
   39.7    27.8    23.1      4.1      3.5      3.1    17.5    12.7    10.6    10.2    13.0    13.6
India - Mid cap
Dalmia Bharat DALBHARA IN Not Rated         3.2    73.8    43.1    30.8      2.2      2.1      2.0    11.4    10.0      8.7 NA 4.4 5.8
Ramco Cement TRCL IN Not Rated         2.7    36.7    28.2    22.5      4.1      3.7      3.2    19.1    15.0    12.4 11.8 13.8 15.1
JK Cement JKCE IN Not Rated         1.2    28.0    19.4    16.9      3.0      2.7      2.4    11.1      8.9      7.5 11.3 14.5 14.8
Birla Corp BCORP IN Not Rated         0.7    19.2    16.0    13.4      1.1      1.0 NA      6.2      5.3      4.7 5.8 7.0 8.3
Star Cement STRCEM IN Not Rated         0.7    20.5    14.2    13.3      5.0      2.6      2.3    16.6    10.0      9.0 27.1 19.7 18.3
India Cements ICEM IN Rating Suspended         0.4     163    14.2    10.3      0.6 NA NA      9.6      6.4      5.7 0.4 4.5 5.9
Prism Cement PRSMJ IN Equity Not Rated         0.7 NA    19.3    15.9      4.2      3.6      3.0      9.6      8.1      7.2 10.8 19.8 20.7
JK Lakshmi JKLC IN Not Rated         0.6    83.1    20.3    13.8      2.9      3.1      2.6    11.4      8.3      7.0 3.5 12.0 15.7
Orient Cement ORCMNT IN Equity Not Rated         0.3 NA    16.9    14.2      2.2      2.1      1.9    11.4      7.8      7.2 4.6 12.7 13.7
Sagar Cement SGC IN Not Rated         0.2 NA       28    21.0      1.6      1.4      1.4    10.3      7.2      5.7 1.7 5.4 7.7
Mangalam Cement MGC IN Not Rated         0.1 NA    25.5    12.5      1.3      1.2      1.1    20.2      9.3      7.5 NA 6.0 9.4
Deccan Cement DECM IN Not Rated         0.1    12.1      8.3      7.4      1.4      1.2      1.0      5.0      3.9      3.6 11.9 15.4 15.2
   54.5    21.1    16.0      2.5      2.2      2.1    11.8      8.4      7.2      8.9    11.3    12.6
Regional cem ent
Lucky Cement LUCK PA Not Rated         0.8    8.4  10.4    9.5    1.2    1.2    1.1    6.6      6.8      5.8 12.2 12.4 11.7
Indocement INTP IJ Not Rated         5.2    66.0    45.7    35.0      3.2      3.1      3.0    28.7    22.8    18.6 5.3 7.0 8.7
Semen Gresik SMGR IJ Not Rated         4.9    23.1    29.4    20.7      2.3      2.2      2.1    15.0    12.8    10.8 9.7 7.6 9.9
Anhui Conch 914 HK  Buy      31.5      8.4      8.6      8.8      2.2      1.9      1.6      4.4      4.5      4.7 29.6 24.2 20.8
BBMG Corp 2009 HK  Not Rated         5.2      8.0      6.6      6.1      0.6      0.4      0.4    13.2    12.3    11.9 9.3 6.9 7.0
China Resources Cement 1313 HK  Buy         6.6      6.3      6.7      6.7      1.3      1.2      1.1      4.0      4.2      4.2 20.9 19.6 17.8
CNBM 3323 HK  Neutral         6.9      6.7      5.8      6.2      0.7      0.6      0.6      6.1      6.1      6.1 11.8 11.0 9.9
Siam cement SCC TB Buy      17.7    12.3    12.1    11.5      2.0      1.8      1.7    10.8      9.8      9.2 16.5 15.1 14.6
Dangote Cement DANGCEM NL  Not Rated         8.7      8.1    11.9    10.4      3.0      3.0      2.9      7.4      6.9      6.2 40.1 27.3 28.6
Taiw an Cement 1101 TT  Not Rated         7.1    10.1    10.0      9.8      1.2      1.2      1.2      8.1      7.3      7.2 13.0 11.7 11.1
Asia Cement 1102 TT  Not Rated         5.0    13.2    10.9    10.8      1.1      1.1      1.0    10.0      8.8      8.2 8.9 9.9 8.9
Siam City Cement SCCC TB Not Rated         2.2    22.7    18.1    16.6      2.1      1.9      1.9    11.7    10.7    10.4 10.0 10.7 11.4
   16.1    14.7    12.7      1.7      1.6      1.5    10.5      9.4      8.6    15.6    13.6    13.4
EU/US
LafargeHolcim LHN VX  Not Rated      30.0    20.0    14.2    12.7      1.1      1.1      1.0      9.6      7.3      7.0 5.5 7.5 8.2
CRH CRH ID  Not Rated      25.7      9.5    13.6    12.2      1.5      1.4      1.3      9.1      7.6      7.2 16.5 10.6 10.8
Heidelberg HEI GY  Not Rated      15.5    12.1    10.7      9.8      0.9      0.9      0.8      7.7      6.8      6.5 7.6 8.1 8.5
CEMEX CEMEXCPO MM Not Rated         6.3  
229.6  
184.3  
150.2    13.1    11.2    10.3      8.3      7.0      6.6 6.0 7.2 7.8
ARGOS CEMARGOS CB Not Rated         3.0    47.6    31.4    26.1      1.3      1.2      1.2    11.7    10.1      9.4 1.8 3.9 4.9
Buzzi BZU IM Not Rated         3.9      9.6    11.1    10.1      1.3      1.1      1.0      7.3      6.7      6.4 5.5 9.8 9.9
Vicat VCT FP Not Rated         2.3    13.3    12.0    10.7      0.9      0.9      0.8      6.8      6.0      5.6 6.8 7.1 7.5
TITAN TITK GA Not Rated         1.7    26.6    18.2    14.1      1.1      1.1      1.0      9.5      8.5      7.8 3.5 5.4 6.8
CIMSA CIMSA TI Not Rated         0.1      5.3      6.5      3.7      0.6      0.5      0.5      6.5      6.0      4.7 10.5 11.1 13.3
   48.6    40.3    34.7    11.6    11.3    11.2    16.1    15.2    14.7    13.8    15.2    15.9
Note: Nomura estimates for UltraTech, Shree Cement, Ambuja and ACC; Bloomberg consensus forecasts for all others
Source: Bloomberg, Nomura estimates. Pricing as of 11 June 2019.

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Nomura | Shree Cement 12 June 2019

Appendix A-1
Analyst Certification
We, Anil Sharma and Aditya Bansal, hereby certify (1) that the views expressed in this Research report accurately reflect our
personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our
compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this
Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by
Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures

The terms "Nomura" and "Nomura Group" used herein refers to Nomura Holdings, Inc. and its affiliates and subsidiaries, including Nomura
Securities International, Inc. ('NSI') and Instinet, LLC('ILLC'), U. S. registered broker dealers and members of SIPC.

Materially mentioned issuers

Issuer Ticker Price Price date Stock rating Sector rating Disclosures
Shree Cement SRCM IN INR 20546 12-Jun-2019 Neutral N/A
Ultratech Cement UTCEM IN INR 4569 12-Jun-2019 Buy N/A

Shree Cement (SRCM IN) INR 20546 (12-Jun-2019) Neutral (Sector rating: N/A)
Rating and target price chart (three year history)
Date Rating Target price Closing price
15-Nov-18 18,000.00 15,858.40
12-Jan-18 22,900.00 18,872.30
26-Sep-17 Buy 17,913.80
26-Sep-17 23,500.00 17,913.80
20-May-17 Suspended 18,664.10

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology We value SRCM at blended 17.0x FY21F EV/EBITDA. Our TP for SRCM is INR21,500. The
benchmark index for this stock is the Nifty 50.

Risks that may impede the achievement of the target price Key upside risks include higher than expected cement realisation
increase, higher volume growth and/or higher cost reduction. Key downside risks include weak cement demand, lower cement
prices and increases in operating costs.

10
Nomura | Shree Cement 12 June 2019

Ultratech Cement (UTCEM IN) INR 4569 (12-Jun-2019) Buy (Sector rating: N/A)
Rating and target price chart (three year history)
Date Rating Target price Closing price
26-Apr-19 5,500.00 4,609.95
25-Jan-19 4,400.00 3,510.80
26-Sep-17 Buy 3,914.65
26-Sep-17 5,150.00 3,914.65
20-May-17 Suspended 4,360.60

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology We value UT at 15x FY21F EV/EBITDA to arrive at our TP of INR5,500. The benchmark index for this
stock is the Nifty 50.

Risks that may impede the achievement of the target price Key downside risks to our positive view includes weak cement
offtake from UT legacy as well as from JPA assets, lower cement price realisations and a sharp increase in operating costs.

Important Disclosures
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The distribution of all ratings published by Nomura Group Global Equity Research is as follows:
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44% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 53% of companies with
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6% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 13% of companies with
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EEA) with this rating were supplied material services by the Nomura Group.
As at 31 March 2019.
*The Nomura Group as defined in the Disclaimer section at the end of this report.
** As defined by the EU Market Abuse Regulation

Distribution of ratings (Instinet, LLC)

The distribution of all ratings published by Instinet, LLC Equity Research is as follows:
55% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; Instinet LLC has provided
investment banking services to 0% of companies with this rating within the previous 12 months.
41% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; Instinet LLC has provided
investment banking services to 0% of companies with this rating within the previous 12 months.

11
Nomura | Shree Cement 12 June 2019

4% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; Instinet LLC has provided
investment banking services to 0% of companies with this rating within the previous 12 months.

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The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock,
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target price, defined as (target price - current price)/current price.

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Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed
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12
Nomura | Shree Cement 12 June 2019

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Nomura | Shree Cement 12 June 2019

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