Published on 21/03/2020 12:41:07 PM | Source: SKP Securities Ltd

Buy Star Cement Ltd For Target Rs. 137 - SKP Securities

Posted in Broking Firm Views - Long Term Report| #Cement Sector #Broking Firm Views Report #SKP Securities Ltd #Star Cement Ltd

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Company Background Star Cement Ltd (SCL), promoted by Mr. Sajjan Bhajanka, Mr. Sanjay Agarwal (also promoters of Century Plyboards) and Mr. Rajendra Chamaria is the largest cement player in the North East Region (NER) with ~23%+ market share selling under ‘Star Cement’ brand. It has fully integrated cement plants with installed cement capacity of 4.3 MTPA; 2.8 MTPA of clinker capacity and 51 MW of power plant located in Meghalaya and Assam.


Investment Rationale

Top-line to grow at a CAGR of ~8.7% over FY19-22E

* During Q3FY20, Star Cement reported net sales of Rs 4,511 mn, a growth of ~8.3% y-o-y, led by 14.8% y-o-y increase in volumes to 0.75 MTPA while realisation contracted by 5.3% y-o-y owing to weakness in the pricing environment. Cement prices declined by ~Rs 10-12 per bag in the NER and ~Rs 15-25 per bag in the eastern markets. Prices, however, partly recovered in January and February. NER: East sales mix stood at ~77%:23%.

* While offtake in H1FY20 remained weak owing to weak demand and heavy monsoons, the trend seems to have reversed in the Company’s major market from Q3FY20. A pick-up in construction activity post floods in NER and expected commissioning of the Siliguri plant by Q4FY20E should drive sales volumes. While the management expects the NER to end the year at ~8-9% growth and the eastern markets at 5-6% growth. However, higher volumes in the eastern region would put pressure on overall realisations as pricing in the NER region is higher than the eastern region.

* Going forward, we expect Star Cement sales to grow at a CAGR of ~8.7% during FY19-22E on the back of (1) GoI’s thrust on infrastructure development in NER (2) en-route to eastern market with robust distribution network and retailcentric business model (3) superior brand mix and innovative marketing strategies, resulting in better capacity utilization and higher sales volume.


Margins to stabilize at ~23%+ with focus on rationalising cost structure

* EBITDA margins during Q3FY20, contracted by 844 bps y-o-y to ~20.8%, on account of higher usage of imported coal, combined with lower realisations. EBITDA/tonne also declined 32.8% y-o-y to Rs 1,250/tonne. On an absolute level, EBITDA also declined 22.9% y-o-y to Rs 939.9 mn.

* Going ahead, with pet coke prices declining and better availability of domestic coal, Company should witness moderation in fuel costs. Furthermore, various measures implemented in optimising costs and rationalising freight would lead to a better operational performance. Therefore, we expect EBITDA margins to stabilize at ~23%+ by FY22E.


Capex underway to encash substantial future growth opportunity

* Star Cement has guided to start the Siliguri grinding unit (2 MTPA) in Q4FY20E. In relation to the plant, the Company would be disbursing Rs 1 bn of the pending payments to contractors, with most of the capex being completed. The Company has also applied for various clearances for setting up a 2 MTPA clinker unit in Meghalaya. This plant should get commissioned within 24-30 months after receiving the environment clearance. It also plans to set up a 12-15 MW waste heat recovery plant (WHRS) with this clinker unit. The Meghalaya plant is expected to start operations in FY23.



* With Government’s thrust on infrastructure development, Star’s leadership in NER with entry barriers, strong brand pull and pricing power coupled with robust distribution network, retail-centric business model, lean balance sheet and enhancing return ratios, augurs well for Star Cement. We have valued the stock on the basis of EV/EBIDTA ‐ of 10x of FY22E EBIDTA – method of relative valuation and recommend “BUY” on the stock with a target price of Rs 137/- (~71% upside) in 18 months.


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