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Higher prices, cost control inflates EBITDA

Star Cement (STRCEM) reported higher-than-expected EBITDA of Rs1.24bn (CentrumE: Rs890mn), up 9.5% QoQ/34% YoY. The beat was due to higher than expected cement realization. Blended cement realization, at Rs 6,796/t, was up 4.5% (Rs293/t) QoQ, benefitting from higher prices in early Q1FY23. Overall CoP/t was flat QoQ at Rs5,530 despite rise of power & fuel cost as RM cost was down. This resulted in increasing EBITDA/t by Rs283 QoQ to Rs1,267/t. We note that CoP/t of STRCEM peaked out in Q3FY22 which is contrary to Industry peers. STRCEM has witnessed price decline of Rs20-25/bag in East while almost flat in North East since June. We increase our FY23E EBITDA by 19% to factor in Q1FY23 numbers and lower CoP. Our FY24E EBITDA remain unchanged. However, FY23/FY24 net profit is revised downwards by 3%/25% to factor in higher tax rate (effective tax rate is 35% but tax cash outflow will be MAT only). We value the stock at 10.0x FY24E EV/EBITDA and arrive at a TP of Rs118. Reiterate BUY.

Lower volume offset higher cement prices; net sales declines 11% QoQ

Blended realization increased 4.5% QoQ/1.2% YoY to Rs6,796/t to offset rising fuel cost. Heavy floods in North East and seasonality led cement volume (including clinker) to decline by 15% QoQ to 0.98mt. The North East contributed ~66% (71% in Q4FY22) of total volume and the eastern region (from Siligurhi plant) sales were 34%. Its grinding unit at Siliguri has operated at ~67% in Q41FY23. Lower volume offset higher realization and as a result, net sales decreased by 11% QoQ to Rs6.66bn.

Lower RM cost offset higher power & fuel cost, keeping overall CoP/t flat QoQ

Blended operating cost was flat QoQ at Rs5,530/t as higher power & fuel cost was offset by lower RM cost. The power & fuel cost/t was up Rs171/t QoQ to Rs1,325/t while RM cost/t, at Rs1,579, was down Rs276/t QoQ. Freight cost was under control and it dipped 0.8% QoQ to Rs1,334/t. As a result, despite lower revenue, EBITDA increased by 9.5% QoQ to Rs1.24bn and EBITDA/t at Rs1,267, up 29% QoQ (Rs283/t). The tax holiday period enjoyed by Company's Guwahati grinding unit and its subsidiary, Star Cement Meghalaya Ltd has ended in FY22 leading to an overall increase in tax. Effective tax rate for Q1FY23 stood at 35.8% v/s ~-1% in FY22. As a result, net profits declined 24% QoQ to Rs676mn.

Capex of Rs20bn in next two years; capacity to increase by 4mtpa by FY24-end

STRCEM has received EC clearance for setting up 3mtpa clinker unit and 12MW WHRB in Meghalaya and it has ordered equipment and started civil work. It is expected to be commissioned by Dec2023. Further, it is setting up 2mtpa grinding capacity in Guwahati by January 2024 and another 2mtpa in Silcher, South Assam which is expected to be commissioned by March 2024. The capex is estimated at Rs20bn (Rs10bn each in FY23 and FY24) to complete this project.

Reiterate BUY with TP of Rs118

STRCEM has managed its overall cost well for last two quarters. Q2FY23 will be a seasonally weak quarter with lower prices and volumes but cost is expected to be flat QoQ as higher supplies from Coal India at earlier agreed lower price is expected in Q2FY23. We expect volume CAGR of 11% over FY22-24E to 4.2mt in FY24 by ramping up existing capacities. It is expediting capex to expand capacity by 4mtpa by FY24-end which leverage balance sheet initially. We retain our BUY rating, with a target price of Rs118.

Valuations

We value the stock at 10.0x FY24E EV/EBITDA and arrive at a target price of Rs118. We retain our BUY rating.

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