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Volume momentum picking up

We maintain BUY on Star Cement with a TP of Rs 135 (10x Sep’21E consol EBITDA), implying EV of USD 176/MT.

HIGHLIGHTS OF THE QUARTER

* During 3QFY20, while demand uptick drove up consol revenues by 8% YoY, NSR slide and elevated fuel cost pulled down EBITDA/PAT by 23/14% YoY. Star reported EBITDA/APAT came in 7/6% lower vs our est.

* Robust demand but weak realization: Sales vol jumped 15/25% YoY to 0.75 mn MT on demand rebound in the NE region and on market share gains outside NE. However, cement prices continued to slide QoQ across its markets, leading to 6% NSR decline YoY.

* Elevated fuel costs further pulled down EBITDA: While Star’s fixed costs fell 15% YoY on higher utilisation, higher fuel prices and increased share of traded cement purchase pulled up opex by 5% YoY. Thus, unitary EBITDA fell 33% YoY to Rs 1,250/MT, pulling down EBITDA. Other Income soared 5x YoY on rising cash surplus, thus moderating PAT decline.

* 9MFY20 performance: While sales vol recovered 3% YoY (on overall growth in 3Q), NSR fell 4% YoY (continuous slide), pulling down unitary EBITDA 19% YoY to Rs 1,299/MT, even though as opex remained stable (+1% YoY). Thus, while revenues remained flat YoY, EBITDA/PAT declined 16/4% YoY.

* Expansion update: Star guided that the Siliguri GU plant (2mn MT) will get commissioned in Mar’20. It is awaiting environment clearances to start work on brown field clinker expansion in Meghalaya (2mn MT). Star is also planning to add WHRS in Meghalaya to reduce cost and carbon footprint.

STANCE

We estimate Star to deliver consol EBITDA CAGR of 8% during FY19-22E (in-line consensus). We continue to like Star for its leadership positioning in the lucrative NE region, which drives its industry leading op margin and healthy return ratios. Further, its net cash position currently boosts its expansion capability. Thus, we value it at 10x EV/EBITDA (15% premium to its 5-yr mean), leading to TP of Rs 135 (10x Sep’21E EBITDA). We maintain BUY on the stock.

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