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Our Take:

Star Cement Ltd (SCL) is a dominant player in the North-East region with ~25% market share. It has 5.69 MTPA of cement capacity, 3 MTPA of clinker capacity and a 51-MW captive coal-based power plant. The company has been focusing on increasing its captive power plant capacity, which should improve its operating efficiency. We believe that it has a strong, sustainable competitive advantage in the North East region, as entry of outside players in this market is limited. Also, since it plans to increase its capacity to 10mn mt by 2025, from the current 5.7mn mt, its volume growth has good visibility.

Eastern India region is largely underpenetrated and, thus, has good growth potential compared to the rest of country, where the company has major capacity.

View & Recommendation :

We expect that the company will get benefit from the strong regional presence, improving utilization, and cost efficiencies, apart from industry triggers of higher realization. We like Star Cement due to its strong, experienced management, healthy margins on the back of substantial ongoing cost reduction, net cash positive balance sheet with superior return ratio’s, and future growth visibility on the back of expansion plan. However, in the short to medium term, demand recovery in core markets continues to be the key monitorable.

We expect 10% CAGR in the topline and 12% EPS CAGR over FY20-23E. At the LTP, the company is trading at FY23E EV/T of $92.3/T, 6.7x FY23E EV/EBITDA. We believe the base case fair value of the stock is Rs.97 (FY23E EV/T of $92.9/T, 6.7x FY23E EV/EBITDA) and the bull case fair value is Rs.112 (FY23E EV/T of $107.7/T, 7.8x FY23E EV/EBITDA). Investors can buy the stock at Rs 84 (FY23E EV/T of $80.1/T, 5.8x FY23E EV/EBITDA) and add on dips to Rs.77 (FY23E EV/T of $73.2/T, 5.3x FY23E EV/EBITDA).

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