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Healthy operational performance…

About the stock: Star Cement operates in a complex geographical topography and has built competitive advantages owing to its experience of operating in the North Eastern Region (NER) of India and has fortified its presence with a material volume share of ~25%.

* Star has capacity of 3.7 MT in NER with clinker capacity of 2.8 MT (with 12 MW WHRS and 51 MW thermal power). It has an integrated cement plant at Meghalaya with proximity to abundant limestone reserves (2-3 km)

* It also caters to eastern region (~25% of volumes) through its grinding unit in Siliguri (West Bengal). Overall capacity: 5.7 MT

Q4FY23 Results: Star reported healthy profitability despite weak realisations. Capacity utilisation was at 88% vs. 81% YoY.

* Revenue grew 10% YoY to | 825 crore mainly driven by volume growth of 7.4% YoY to 1.23 MT. Capacity utilisation rates in North Eastern Region were at nearly 100% in Q4FY23

* Overall cost of production declined sharply by ~| 294/t (QoQ) to | 5335/t in Q4FY23. Generated healthy EBITDA/T of | 1346/t (highest in the industry; Q3FY23: | 1194/t, Q4FY22: | 986/t)

* Absolute EBITDA grew 47% YoY to | 166 crore (up 53% QoQ

What should investors do? The North Eastern Region has favourable demandsupply dynamics with overall ~14 MT of grinding capacity and 12 MT of cement consumption. Star has embarked on a journey to further strengthen its market share in NER to 30%+ by FY26E by more than doubling its capacity. It continues to have a robust b/s, debt free status and cash & investment worth | 480 crore. Star trades at reasonable valuations of 8x FY25E EV/EBITDA (US$70/t).

* We remain positive and reiterate our BUY rating on the stock

Target Price and Valuation: We value Star at | 150 i.e. ~9x FY25E EV/EBITDA

Key triggers for future price performance:

* Enhanced capacity utilisation, backed by the government’s thrust on infrastructure development in the NER and better pricing power would enable Star to register revenue and earnings CAGR of 14% and 17%, respectively in FY23-25E

* In a bid to capture long term growth opportunities and further strengthen the market share, Star has embarked on capacity expansion and outlined capex worth ~| 2300 crore

* The company is setting up 3 MT clinker unit with 12 MW WHRS at Meghalaya and two grinding units of 2 MT each in Assam

Alternate Stock Idea: Apart from Star, in our cement sector coverage we also like Sagar Cements. BUY with a target price of | 240/share

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