Shree Cements: Shree Cement overvalued, but market sees it as growth stock: Sameer Narayan

What is your view on Aurobindo Pharma? This one seems to be defying all odds.


Well, this was one big overhang because Unit 4 was very critical and apart from all the building blocks that they had built over the last couple of years, suddenly when the unit came under FDA cloud, the stock had corrected a fair bit. So, today, it is going at about EV/EBITDA of 9. The delay in approvals was an overhang on the unit and with the EAI status being granted, it is only a matter of time till they get the approval. If that happens, then the growth visibility comes back into play because the market had corrected the stock a fair bit once the FDA restriction came into the news. After this, it is a tremendously positive news item, the growth visibility with which the stock was earlier being looked comes back on the table.

It is one of the stocks you could say is cheap but it has not made money. This is despite the endorsement coming from the ultimate heroes and the big cowboys and the ultimate stars. Why is that?


Well if the stars invest in a stock that does not mean the stock will not be exposed to the vagaries of the cycle. But you are looking at it maybe over the last 12 to 24 months. However, if you take the timeframe in a slightly stretched horizon, then Aurobindo has done fairly well for investors. Even today at 10 times forward multiple, in case the growth is back into question, then the stock definitely has upside from these levels. In a market where growth is elusive, if growth certainty for a stock becomes more evident and the valuations are comfortable, then the investors would be better positioned towards looking at it more amenably.

Any PSU you would want to bet on?

There are a lot of businesses that look good at this value. For instance BEL. The last quarter was not up to expectations therefore the stock has corrected a fair bit. There is always an ETF overhang. But at that valuation, the business looks good. The way we are looking at the iron ore auctions, I think NMDC is definitely of value but the larger context is the whole PSU flavour would be in relation to how investors perceive the divestment target would be met in the current fiscal.

Why are you not selling Shree Cements? It is the most expensive cement stock in the world.

Even today it is still giving you a 1400 kind of EBITDA per tonne which even the largest scale player that is UltraTech has not matched up to despite the fact that they have cost synergies from the Century acquisitions as well as the Jaypee integration. And that is the reason why Shree gets EV/EBITDA multiple of close to about 18 times. Again it is at a sector average of about 8-9. Very clearly the market is looking at it as a growth stock that can compound earnings at say 20-25 per cent over three years. And as Mr. Bangur, MD of the company himself said that he will have sufficient cash, sufficient margin. You have got size as well as profitability and that is what the market likes.

So one should just stay invested and ignore the valuations? It is the most expensive cement stock in the world. It is a cement company which is commanding PE multiple of consumer company.


I agree but right now one has to look at what is happening across the market. You are valuing profits and their certainty and because today no other asset class is giving you reasonable inflation-beating returns that is why such companies become franchises of their own and hence keep getting valued at those prices. Trent or DMart are the companies where the investors believe that 25-30 per cent earnings CAGR will be delivered; that is fairly high. And that is where you start looking at a PE to G kind of multiple. I think market cycles overvaluation phases and over a period of time, these stocks will never come back through the classical tenets of value investing.


Shree Cement in the last 10 years is up 50x; at the same time ACC, Ambuja have doubled. You will not manage to even beat the index if you bought into the India housing/infrastructure/cement story. On a comparative basis, large cement companies have disappointed, niche cement companies have managed to surprise everyone.

Profitability is what people are valuing because on a sector basis and for now the growth is not visible. You are down to 5-6 per cent kind of volume growth but the market is looking at it as a transient mode. As the growth picks up the volume growth will also come back but right now what is getting valued is clearly the EBITDA per tonne and the sustainability.

India Cements also has a great EBITDA per tonne; how come it is not getting valued?

Then that is why we come to the other problems of the CSK angle. As far as Shree Cement goes it was a pure cement play. They always had good control over the fuel cost which is a large part of the cement mover and they continue to maintain organic growth. If you look at Shree, it has not done any great inorganic acquisition. They have always grown organically and now they have become a player of size. They are giving profitability per tonne and the growth in their markets realisations are good and holding up. That is why the stock will trend. I agree that at $12 billion of market cap, it is definitely overvalued but chances are it will remain so. If the profitability visibility to the investor is high, the stock can remain at these values.