Prabhudas Lilladher has maintained an Accumulate rating on Shree Cement Ltd. (SRCM), with a revised target price of Rs 25,815. Despite sluggish demand and a challenging Q2 FY25, the company has shown resilience through its premium product focus, cost efficiencies, and strategic investments in green energy. With weaker-than-expected volumes due to lower government spending and tepid demand, Shree Cement is now focusing on profitability through operational efficiencies. Investors should monitor key developments in regional demand, government spending on infrastructure, and cost-control measures as the company targets improved margins in the coming quarters.

Q2 FY25 Performance: Volume Decline Amid Weak Demand

Decline in Revenue Due to Lower Volumes
Shree Cement’s Q2 FY25 revenue declined 19% YoY to Rs 37.3 billion, primarily due to a 7.3% YoY decrease in cement volumes. The company’s shift towards a value-over-volume strategy contributed to the decline, alongside weaker demand across the North and East regions. Despite the overall volume drop, Shree Cement achieved relatively better average realizations per ton compared to peers, aided by a 15% contribution from premium products.

EBITDA Impacted by Lower Realizations and Utilization
EBITDA fell 32% YoY to Rs 5.93 billion, with EBITDA margins contracting to 15.9%. The decline was driven by lower blended realizations, reduced operating leverage, and higher freight costs. Power and fuel costs decreased by 9.6% QoQ due to lower fuel prices, while reclassification of royalty to raw material costs led to an uptick in overall RM/t costs.

Strategic Initiatives and Regional Demand Trends

Focus on High-Margin Premium Products
During Q2 FY25, Shree Cement increased its trade volumes, with premium products making up 15% of total sales, a rise from 9% in the previous quarter. The company aims to maintain this premium product share over the next two quarters, focusing on sustaining profitability through higher-margin offerings even amid weak demand.

Regional Demand Outlook
Shree Cement anticipates stronger demand growth in the North and South regions, while demand in the East is expected to remain subdued. This regional focus aligns with management’s forecast of a gradual improvement in demand, potentially driven by renewed government spending and infrastructure projects.

Cost Control and Green Energy Initiatives

Expansion of Green Energy Capacity
The company is investing in renewable energy, with plans to increase its green power capacity to 60% by Q1 FY26 from the current 54.8%. This shift is expected to mitigate energy costs and contribute to operational efficiency over the long term.

Logistics Optimization
Shree Cement has undertaken several measures to reduce logistics expenses, including commissioning rail sidings and optimizing lead distances, which declined to 433 km from 453 km in the previous quarter. These efforts are expected to reduce freight costs and improve distribution efficiency as the company seeks to lower its cost structure.

Capital Expenditure and Expansion Delays

Capex Plans and Delayed Project Timelines
Shree Cement has earmarked Rs 40 billion per year over the next four years for capacity expansion, with ongoing projects in Jaitaran, Baloda Bazar, and Etah facing slight delays due to market conditions. These projects are now expected to be commissioned in Q1 FY26. The company reiterated its long-term target of achieving 80 million tons per annum (mtpa) by FY28, aligning with its growth ambitions in key markets.

Financial Adjustments and Revised Estimates
Given the volume weakness in FY25, Prabhudas Lilladher has reduced its EBITDA estimates for FY26 and FY27 by around 7%. The firm anticipates improvements in operating efficiencies and cost structures, leading to gradual margin recovery from FY26 onwards.

Financial Outlook and Target Valuation

Revenue and Profit Projections
Shree Cement’s revenue is projected to grow 11.4% YoY in FY26 and 10.7% in FY27, driven by gradual demand recovery and improved pricing. EBITDA margins are expected to expand from 19.8% in FY25 to 22.1% by FY27, as cost-control measures and renewable energy investments take effect.

Valuation Metrics and Target Price
The stock is currently trading at an EV/EBITDA of 17.3x for FY26 and 14.9x for FY27. Prabhudas Lilladher’s revised target price of Rs 25,815 reflects an EV multiple of 17x on September 2026 EBITDA, supported by the company’s strategic focus on cost efficiency and high-margin products.

Investment Risks and Considerations

Demand Volatility in Key Regions
Shree Cement’s performance is sensitive to regional demand fluctuations, particularly in the North and East markets. Slower-than-anticipated government spending on infrastructure could impact cement demand and revenue growth.

Operational Challenges and Capex Execution
The company’s ambitious capex plans entail significant execution risks, especially if market conditions remain weak. Delays in project commissioning could impact capacity utilization and revenue growth.

Conclusion and Investor Recommendation

Prabhudas Lilladher’s Accumulate recommendation with a target of Rs 25,815 reflects confidence in Shree Cement’s long-term growth potential. The company’s emphasis on premium products, cost-control measures, and green energy expansion positions it well in a challenging market. Investors should track key developments in demand, infrastructure spending, and cost-control initiatives as they assess Shree Cement’s prospects for margin recovery and growth.