Shree Cement Limited (SHREECEM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Shree Cement Limited Q1 FY '27 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Navin Sahadeo from ICICI Securities Limited. Thank you and over to you, sir.

Thank you, Palak. Good evening, everyone. On behalf of ICICI Securities Limited, I welcome you all to the Q1 FY '27 earnings call of Shree Cement. From the management, we have with us Mr. Ashok Bhandari, Mr. Subhash Jajoo, Mr. S.S. Khandelwal, and Mr. K.K. Jain. So without any further ado, I hand over the floor to Mr. Ashok Bhandari for his opening comments. Over to you, sir.

Thank you, Navin. Good evening, everybody. Before we start the actual Q&A, I just want to make 2 specific points. Point number one is that I have been pointing out to you guys that we should -- this time has probably come and we should look at consolidated numbers instead of stand-alone. This quarter, almost 10% of the turnover has been contributed by my overseas subsidiaries and 100% subsidiary in India. And the stand-alone number is about 88%, 89% only. All these are cement businesses. So we would like to request everybody to start looking at the consolidated results and not stand-alone results. Going forward, I sincerely believe that due to doubling of capacity at Ras Al Khaimah in UAE, which should be on stream by third quarter '26, '27. And increase in penetration to eastern market, the Shree Cement East performance should also improve. And going forward, in the not too distant future, probably the stand-alone Shree Cement should constitute about 75% to 80% of total revenue and the other will have constituents 20% to 25% of revenue. So to have a more transparent and clearer picture on how we are faring in our gray cement business, it is better to look at consolidated numbers. This is point number one. The second point is that you have to appreciate what kind of hardships we had to face because of the Middle East war. Three things happened. Number one, the petcoke, which we were contracted for could not reach us, which had to make us shift the fuel from petcoke to coal. The percentage of petcoke reduced from 54% to 9% whereas coal increased to 74% from 26%. Now the other point is that the contracted gypsum quantity out of Oman could not reach us. Now both had a similar effect. They both adversely affected the cost of production of the company. If this Oman gypsum was not available, we had to procure more expensive gypsum of lower quantity within domestically. If petcoke was not available, then we had to go for lower quality coal, which was available at a more expensive cost. Because of these 2 factors, 2 things happen. The raw material, per se, went up because the gypsum prices went up. Number two, because of lower quality of coal, our conversion factor means clinker to cement ratio changed, which increased the component of clinker in my cement and this is because high ash content coal when physically and chemically reacts with the liquefied calcium oxide, the absorption of ash increases in clinker. If the clinker has more in situ ash, then I get limited on my conversion factor and I have to reduce the quantum of pozzolanic or other cementitious material, ipso facto, this both resulted into higher cost of production and also affected by trade sales because if I'm making -- if my conversion factor is going low, that means I'm producing more OPC. And the biggest market for OPC is non-trade sale. So on one hand, I had a cost push. On the other hand, I had more quantity to sell in nontrade section, both resulted into slightly lower realization and relatively higher cost of production. However, let me tell you, this in no way indicates what we intend to do in the future. We intend to go back to our old philosophy of keep on increasing the conversion factor, optimizing the cost and keep on pushing trade sales, number one. Number two, which you have to also bear in mind that the cement which will be produced and the embedded fuel cost has almost peaked out in our case. The lower cost contracted petcoke had not reached, which has started reaching now. It was substituted by higher cost. We are at about -- instead of guiding 1.82 per kilocalorie cost, we almost touch 1.95 -- and I feel barring anything untoward happening in the Gulf war, the fuel price has almost peaked out. The PVC prices have started coming down. My packing cost has already started reducing. So though I had in last con call said that my cost will peak out in Q2 because of these factors, I think we have almost peaked out in Q1. And if anything untoward doesn't happen in Middle East, this cost should more or less stabilize or rather go down because raw material costs should also come down. Having said this, now I'm opening the floor for question and answer.

[Operator Instructions] The first question is on the line of Rajesh Ravi from HDFC Securities.

Sir, Am I audible?

Yes, you are. Already fine.

Yes, sir.

Yes. First on the housekeeping numbers, what was the fuel cost for Q1 blended and trade mix and the fuel mix you already mentioned? And what was the clinker factor and also cement realization?

[indiscernible] there in my opening statement. I said that my fuel cost for the quarter was 1.95 per kCal. I have said that I had to push more of non-trade sales because the conversion factor had come down. Number three, you have asked about realization, I will give it to Mr. Jain who will give you exact realization number of trade and nontrade. And number, you have said that what is the mix of trade and nontrade? That also Mr. Jain can give you. Over to you.

Yes. The sales realization is INR 4,919 per MT against the...

In Indian rupee.

Yes, in Indian rupee. INR 4,919 against INR 4,854 last June '25.

This is Indian operation only.

INR 4,884?

Yes.

And what was the clinker factor, sir?

The clinker conversion is 1.5. So for current quarter against the 1.58 of the corresponding quarter.

Okay. And trade mix and blended cement?

It's 62% is the trade against 71% in June '25 and 50% blend ratio against the 70% of June '25.

Understood. That's -- okay. Sir, you mentioned that the fuel mix were expensive when you move to thermal coal or you purchased through India. So when you normalize this basis, your procurement, which is now coming into Q2, how should the fuel -- blended fuel cost look for Q2, assuming the things remain steady where they are?

Yes. And I had told you that our fuel cost has almost peaked out, barring nothing untoward happening in Middle East. We are looking at 1.95 today. It may hardly go up by [indiscernible] but that doesn't materially change the cost equation.

Okay. Understood. So this is with the petcoke, which you have -- which was to be received from Gulf regions?

Which was contracted for. And of course, if anything drastic happens in Middle East, it may the equation may change completely. But we don't feel that there will be a material increase. The one point, Rajesh, you have to understand is in spite of all these challenges, quarter-on-quarter -- year-on-year volume growth is standing at staggering 15% plus.

Phenomenal. So this was my next question. Yes. And that was the next question, sir. What is the outlook on the volume now?

And no, no, it's not the big focus on volume or anything. We had never lost -- we are never volume focused. We are profit focused. We have never changed our focus. You will never find us changing our focus. Because of 17% growth already, please understand, you have to appreciate this very clearly. I had guided in March con call that we should do 40 million tonnes in '26, '27. We have already done from Indian operation about 10.4 million, 10.5 million in Q1. We are on track to do 9 million to 9.4 million in Q2. So by H1 '26 '27 -- HY1 '26 '27, we should be at about 19.5 million to 20 million tonnes. You also have to remember that if you look at the general sales mix of the industry, 48% of the quantity gets sold in first 6 months and 52% in next 6 months. If we can, God's blessing, if we can do 20 million tonnes, then you can do your own calculation and see that we can go up from 40 million to maybe 40.5 million or 41 million. But I'm not guiding that. I'm still sticking to my guidance of 40 million tonnes. And I'm saying that as on date, the things as they stand today, we should reach 40 million tonnes and we should deliver a healthier profit Q2 onwards.

Sir. And sir, just continuing on this realization, which you mentioned INR 4,919 for June quarter, and which was INR 4,752. So despite selling higher volumes in nontrade, you were able to see a decent improvement in realization by around INR 160. Is this understanding correct?

Yes, your understanding between numbers. That say so. What you have to understand is that this is, again, you are just looking at standalone. If you look at the consol. I wish you -- I request all analysts to please pay heed to this advice. Henceforth, we will be talking of consol volumes, consol EBITDA. We will not be talking about which constitute -- what -- where it has come from gray cement business, total Shree Cement, including its subsidiaries will be delivering a number, which should be accepted, which -- and EBITDA -- total EBITDA. That's it.

So can we add the consol volumes?

One second. If you look at the consolidated, the volume stands at 114.5 for the quarter. The operational EBITDA without other income, repeat, without other income stands at INR 1,272 crores. The corresponding number June '25, the volume was 99.6 consol. Remember these are consol numbers. Operational EBITDA was INR 1,333 crores, and operational EBITDA per tonne was INR 1,339 whereas this quarter, we have done INR 1,111. So though we have taken the beating on EBITDA per tonne, but I explained to you that this was majorly because of our shift from petcoke to coal, which we were forced to and lack of availability of Omani gypsum, which had cascading effect on raw material cost, conversion factor change has compounded the effect on raw material cost out of Shree costing, and nontrade sale -- increase in nontrade sale has had some depressing effect on my premium sales.

Could you also share March '26 consol volume, sir?

'26 consol? '26 consol...

March '26.

March '26 was 119.4.

Okay. And for full year was around...

One second. You -- please hear me out. So there is a dip from 119.4 to 114.5 on consolidated, isn't it? This dip is majorly because of practically no sales in April and May in UAE because of war. And please understand that UAE, we are doubling. We are going to touch 7 million tonnes by Q3 FY '26, '27. So this number will keep on increasing, my friend. And that is why I'm requesting everybody to start looking Shree from consolidated angle and not from stand-alone angle.

Yes. This is great. This will make it more comparable and really -- and this also enhances the overall profitability numbers for Shree.

The next question is from the line of Amit Murarka from Axis Capital.

Just a question on the nontrade. So while you said that because of the issues in availability of gypsum and petcoke, there was impact on fuel cost.

Mr. Murarka, let me tell you one thing, please. Gypsum has no role to play in shift from trade to nontrade. It is only that weaker quality of coal affects my clinker quality, which affects my conversion factor and that affects my trade sales. My nontrade sale had to increase because my conversion factor was lower and I had to go into the nontrade segment. Please be very clear, gypsum has no role to play in trade or nontrade. Gypsum has a role to play in affecting my raw material cost.

Sure. And could you repeat that again? That's what my confusion was like why you had to shift to non-trade because of this? So you mentioned that the clinker is something you said.

No, I could not get you. What have you said once again?

No, could you please repeat, I mean, why you have shifted to non-trade because of the West Asia crisis.

No, I explained to you, my friend. Petcoke has very low ash. It has only 1% ash. So coal or fuel -- solid fuel chemically and physically reacts with the limestone throughput. If I have very low quantity of ash in my fuel, the ash absorption in clinker will also be very low. If I'm using a 20% ash content coal, the ash absorption in clinker increases. That means in the in situ or within the molecule of clinker because of low-quality coal, more ash is there. So I cannot dilute the clinker by adding more and more pozzolanic material. I have to use less and less pozzolanic material. That means more gypsum is to be consumed. Now gypsum itself became expensive. Clinker is 2/3 of the cost of production. If that component has come down from 1.58 to 1.50 please understand it will have its own cascading effect. And that is -- and if I'm having a lower conversion factor, I will have to look at OPC -- sorry, primarily OPC buyers, if I'm looking at OPC buyers, then non-trade is the only segment where I can sell. But this is all 1 quarter delta. This is all the effect in this quarter. I don't think this is a very unique situation which we have faced. I don't think this will repeat in the future, provided nothing explodes in Middle East.

Sure, sure. So on a more sustainable basis, what is the trade, nontrade mix that you would like to have then?

I would like to go back to 70% and 30% nontrade here. But if wishes were horses, beggars would ride. Why should I go back? All of our -- the history of this company proves that we have been champions in trade sales. It is only because of this typical problem of low-quality coal to be consumed because of Middle East war that I had to reduce my conversion factor, which fronted my growth in trade sales and I have to necessarily address non-trade markets.

Okay. Got it. And just also RMC performance, if you could share in the quarter?

RMC, how much can I share? We have 26 operational plants -- we had 19 at the beginning of the year. We have added 8 plants in this quarter. We intend to add another 10 plants in next quarter. But please, RMC as on date is almost a profit-neutral game. As we learn the business, as we start pushing more volumes, the operating efficiency itself should bring the EBITDA of this business to at about 5% levels. But as on date, RMC is not meaningfully contributing to my bottom line.

The next question is from the line of Kunal Shah from DAM Capital.

So just first question on this 17-odd percent volume growth. Could you just...

Kunal. Kunal, I'm sorry, I can't hear you properly.

Is it audible now?

Kunal. Sir, can you please use your handset? Yes, sir.

Yes, it's the handset. Sir, just the first question on the India operations and the 17% volume growth. Could you just help with how would this growth be looking across our regions, basically primarily between Northeast and South? And also some understanding on the regional utilization as well during 1Q?

I am giving the line to Mr. Subhash Jajoo. He has all the numbers. He'll be able to help.

Kunal. first, coming to your question on capacity utilization. So the North -- for North, it is 66%. For East, it is 60% and for South, it is 57%. Overall, it is 62%, which was almost the same. And obviously, this is at an expanded base because a lot of capacities have also come up. Now on your question on which region saw the maximum growth as compared to last year. So South since the new plant has come in, so our growth was more in South, like sales increased from 11 lakh tonnes to almost 16.9 lakh tonnes. And in North, there was a growth of 20%. So these 2 regions for the maximum highest growth. East was almost flat as compared to last year.

Kunal, I would like to add one more thing. The South -- increase in South capacity utilization and highest growth is a factor of our selling more in the states of Maharashtra and Gujarat, and not only South. South feeds West India market. So we have been able to push our sales in Maharashtra and Gujarat majorly.

Understood. This is helpful. Sir, just a follow-up here. This is an observation. Given that the East utilization, we have a lot of room there, and we're looking at flat volumes. So is it that the overall -- I mean, the industry Eastern market was flat or we've chosen sort of not to...

No, no, no. You -- for comparison's sake, you look at Nuvama's results. You look at the conversion factor of Nuvama. They had a conversion factor of 1.7. And they could do that because they had better quality coal and they had better accessibility to slag. If I reach 1.7, I will beat Nuvama hands down. I had a problem with my coal quality, so I had to keep my conversion factor constrained, and that is why I could not grow in East that much. I have in the beginning of the call, stated that on a consolidated basis, Shree will gradually reduce from today 88%, 80%, Shree stand-alone will gradually reduce from 88%, 89% to 75%. That means Shree Cement East volumes and UAE volumes will go up substantially. But this is a 5-year plan, give or take 5% here or there. But please understand that South -- that East is typically a trade market, trade, you can push more of higher conversion factors, cement. And this time, because of the coal quality, I could not increase the conversion factor. It is not that the slag is not available or fly is not available. It is only constrained by my own processes, difficulties due to low-quality coal.

Understood. This is very helpful, sir. And just to close the loop on the cost, as you mentioned, most of the impact has been absorbed during 1Q. So is it fair to assume that 2Q is broadly looking at operating deleverage, I mean, that would be seasonal and most of the West Asia crisis, the impact would be over, I mean, given the situation remains status quo?

That is what I said, my friend, that if nothing drastic happens in Middle East, you should be able to look at, except for the quantitative variation, which is seasonal, you should see better profitability because my cost, which was likely to peak out in Q2 in fuel has almost peaked up. I'm saying again, the word almost. Don't take it that if I have 0.05 increase in fuel cost next quarter, you will say, [Foreign Language] No. We expect as on date, the fuel cost should not shoot up, provided calm prevails in Middle East and in the minds of our great U.S. President, Mr. Donald Trump.

The next question is from the line of Pinakin from HSBC.

Sir, my first question is, while second quarter is seasonal quarter, if the external environment does not change, the energy prices, petcoke prices are wherever they are, should the second half operating cost be lower than the first half operating cost?

Dear friend, we anticipate so. But then we -- as you may be aware, we never give any EBITDA projections or anything because it is not in our hand. It is market related. Today, as we are sitting on 31st July, I can share with you that we have sold 3.1 million tonnes in this month. The demand is okay. We are -- our plants are operating okay. The fuel cost has not substantially increased. And if calm remains in Middle East, it should not substantially increase. The gypsum cost should come down. The conversion factor should increase because of better quantity -- better -- sorry, larger quantity of petcoke being used, which all should result into better profitability.

Got it, sir. So my second...

Why wait up to HY2, look at Q2 only, which is just 3 months away.

Got it, sir. Sir, my second question is you mentioned that whatever happened in the trade versus nontrade. Will the situation normalize in the second quarter of trade sales going back to your historical averages? Or you see that happening gradually in the second half?

Hopefully, yes.

Hopefully, yes. And as you normalize and sell more in the trade segment versus 1Q, that should have a positive impact on pricing and EBITDA profitability, right?

That is a logical conclusion.

Got it, sir. And lastly, sir, how are prices today versus the June quarter averages in your key markets?

So you are -- today means we are -- so we have not even ended our month yet. How do I give you that number? We have given you the number for June quarter '26 vis-a-vis June quarter '25. You are asking what is the average as on 31st July '25, we are quite advanced in our digitization. But unfortunately, I have -- I don't have the grip on that number. You can send a mail to Jajoo or Mr. Jain subsequently, and we'll reply to this.

The next question is from the line of Siddharth from Kotak Securities.

Sir, just wanted to check out of our around INR 200-odd crore EBITDA, which is not in the stand-alone entity, what was the share of UAE? Because you said the share of UAE went down drastically this quarter due to the war?

Come again, please?

Sir, out of the total EBITDA, which is there in consolidated, but not in stand-alone statements, which is around INR 200-odd crores, what proportion is from UAE?

Well, I would not like to go into those kind of details for various reasons. But then it is out of UAE only. So you can do your calculations whatever you want to do. I will not go into specific number again. You are interested in Shree Cement business EBITDA. We have given you gray cement consolidated business EBITDA. We have given you gray cement consolidated quantity. You figure it out, my friend.

Sir, just let me put it another way. Basically, what is the number sitting in Indian operations, which is not there in our stand-alone statement?

My dear friend, I know how to catch the nose both ways, straight and roundabout. You're not going to get this answer from me.

Okay, sir. No worries. Sir, second, just a question, sir, on the freight cost. Sir, I noticed that they are lower quarter-on-quarter despite this diesel price hike. So sir, any comment on this, please?

Lower what?

Freight cost. Lower freight cost, sir.

Lower freight cost, yes. You do your math again. It's not lower.

Okay, sir. Just a final book-keeping question. Sir, what would be our depreciation and tax rate for this year?

INR 2,400 crores to INR 2,500 crores is the depreciation number. And the tax rate would be about 25%, 30%? 30%.

The next question is from the line of Rahul Gupta from Morgan Stanley.

Just continuing on the previous question. In the last quarter, you highlighted that the UAE business reported AED 47 per tonne of EBITDA. What would be that number in this quarter?

I'm not going to share it.

Then sir, it's a request that please disclose the number for expanding UAE business.

I have understood your request, and I'm just with folded hands, saying that I will not disclose this number. We had not disclosed AED 47 as EBITDA last quarter as well. Last quarter, we had only discussed stand-alone. This is the first time we are talking about consolidated results.

Sir, you had reported AED 247 of revenues. What was that number this quarter?

My dear friend, AED 247 is what? What is that number?

The revenues for the UAE business. So what would be the similar revenues for the first quarter?

I am, again, saying, I have given you the quantity, I'm not going to give you the numbers.

The next question is from the line of Jashandeep Singh Chadha from Nomura.

Chadha, where was you all these days?

Sir, my first question is largely on the demand front. Will it be possible to give some regional trend, what you are seeing in different regions, both for the industry and Shree Cement?

Jajoo just share how we fared in Q1.

No, sir. I mean for the second quarter?

20% incremental demand in East and how much was South?

South was significantly better because of new operational plant.

South, you see we had started new plants, plus we could penetrate the West India market. So he has given you those. Nevertheless, pan-India, the industry is expected to grow at about 7% to 8%. We hope to catch up with 10%. 35.4% is what we did last year and I'm right at about 40% this year.