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Overcoming challenges steadily; maintain BUY

Star Cement’s (STRCEM) Q1FY22 earnings were in line with our estimates, as the logistics issues (connecting bridge repairs) were resolved and normalcy in business was restored. Volume declined ~16% to 0.76mn tonnes in the pandemic-hit quarter, though realization was marginally higher. Revenue fell ~15.5% to Rs5.1bn (in line with estimate) and cost inflation was contained, as logistics costs were restored following normalcy in transport.

EBITDA fell 11% to Rs927mn (Rs1.04bn in Q4FY21). EBITDA/tonne was higher by ~6% QoQ (-16% YoY) to Rs1,218 and EBITDA margin rose to ~18.1% from 17.3% in Q4FY21. Adjusted PAT declined 20% QoQ (grew 57% YoY) to Rs680mn. We expect normalcy to help business regain health and contribution from Siliguri grinding unit to add further strength to the performance. We maintain our FY22/23 estimates. We retain our BUY rating, with a revised target price of Rs125 (earlier Rs121), valuing the stock at 8x FY23E EV/EBITDA.

Volume dropped with stable realization

Cement dispatches declined by ~16% QoQ to 0.76mn tonnes (including marginal clinker sales) in pandemic-impacted Q1FY22. Resolution of bridge connectivity from STRCEM’s units to Shillong provided some support, as it meant reaching markets cost effectively. Blended realization was unchanged QoQ (rose 7% YoY) at Rs6,791/tonne, aided by higher trade mix at 87%. Contribution of the north-eastern region stayed at 80% of total volume and eastern region at 20%. As a result, revenue fell by 15% QoQ (+75% YoY on a weak base) to Rs5.1bn.

Cost and EBITDA margins maintained QoQ

Operating costs stayed unchanged QoQ (rose ~13% YoY) at Rs5,498/tonne, as energy and logistics cost savings helped. Raw material cost includes inter-clinker movement (earlier included in freight cost) from Lumshong to Siliguri, and is hence inflated. Connectivity resolution brought logistics cost back to normal, falling 11% QoQ to Rs1,138/tonne (partially also due to shift of transportation cost in RM expenses). Prudent fuel mix helped energy cost to decline 15% QoQ (marginally up YoY). Plant maintenance and restoring of normalcy led other expenses to fall lower by 8% QoQ (against higher volume decline). Effectively, EBITDA fell by 11% QoQ to Rs927mn while EBITDA margin expanded marginally by 70bp QoQ to ~18% (22.4% in Q1FY21). EBITDA/tonne rose to 1,218 versus Rs1,152 in Q4FY21.

Capacity addition in effect from FY25

Meghalaya clinkerization unit and WHRS (13MW) will be commissioned with planned total outlay of Rs13bn (Rs1.25bn for WHRS plant). The CU will be now of 3mn tonnes and clearances are awaited. WHRS commissioning will be in FY23, while the CU is expected to be effective from FY25.

Valuations & risks – regional diversification to de-risk earnings

We retain our BUY rating on STRCEM, with a revised target price of Rs125 (earlier Rs121), valuing the stock at 8x FY23E EV/EBITDA. We believe leadership position in the North East and de-risking regional concentration with its Siliguri grinding unit enable STRCEM to better guard its earnings. Healthy balance sheet (Rs4bn cash + Rs1.25nn tax incentives + run rate cash generation of ~Rs3bn in next two years) will largely aid new capacities. STRCEM has announced buyback of ~8.25mn shares at a consideration of Rs1.35bn. We feel this will only marginally reduce cash and have no impact on capacity expansion. Coal availability at reasonable cost and delays in capacity addition stay key risks to earnings.

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