Buy Star Cement Ltd For Target Rs.135 - Sushil Finance
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Market leader in North East market
Star Cement (STAR) is a market leader in the North East region, with a market share of ~23%. The company has a strong presence due to its vast distribution network, which includes ~2,100 dealers and ~12,000 retailers. Factors like lower average per capita cement consumption in the region as compared to per capita consumption in the country, high demand due to infrastructure activities in the North East region, and low competition from other cement manufacturers augurs well for STAR going forward.
New grinding unit to cater to East India
The company had 2 leased grinding units in the Eastern market with a capacity of 0.6 MTPA. These have been replaced by a new unit in Siliguri, West Bengal with a capacity of 2 MTPA. Post this capex, the cement capacity of the company has increased from 4.3MTPA to 5.7 MTPA.
Healthy balance sheet aided the expansion
EBITDA per ton (Rs.1,255 for FY21) has been high for Star on account of better realizations in the North East region, translating into high profit margins for the company. The company incurred capex to the tune of Rs.350 cr to set up a grinding unit in Siliguri through internal accruals and the balance sheet continues to remain healthy, despite the expansion
OUTLOOK & VALUATION
Cement sales are likely to see a pick-up in terms of volumes on account of an anticipated increase in spending by the government as well as non-trade segment. Healthy regional dynamics in the North East region as well as increase in capacity in the East by STAR should augur well for the company on a long term basis. We forecast STAR’s revenue/PAT to grow at 16%/12% CAGR over FY21-23E. Going forward, we expect the company to deliver an EPS of Rs.7.3 in FY23; assigning a target multiple of 18x, we arrive at a target price of Rs.135 showcasing an upside potential of 26% from current levels with an investment horizon of 18-24 months. We recommend a BUY at current levels.
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