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Well placed to capture growth opportunities in NER!

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

Key Investment Thesis:

• Expanding capacity to strengthen market share: Star has embarked on a journey to further strengthen its market share in NER to 30%+ (from current 25%) by FY26E by more than doubling its capacity. Company is setting up a 3 MT clinker unit with 12 MW WHRS at Meghalaya (capex: | 1300 crore, completion: Jan-24) and two grinding units of 2 MT each in Assam (capex: | 800 crore, completion: Guwahati in Dec 23 and Silchar in Aug 24). Post the expansion, company’s overall clinker and cement capacity will increase to 5.8 and 9.7 MT, respectively by FY25E. The cost of project stands at US $ 67/t which is ~ 33% lower than industry replacement cost.

• Robust b/s to support aggressive capex plans: Star has a consistent cash generation profile with company recording cumulative CFO (operating cashflows) worth ~| 2800 crore during FY18-23 (average CFO/EBITDA: 105%). It has a cash rich balance sheet with investment of ~| 485 crore. Going forward, we expect company to generate ~ | 1400 crore cumulative OCF during FY23-25E which would assist funding its capex requirements (| 2300 crore). We expect the leverage to remain low at 0.2x with peak debt levels of | 550 crore in FY24E.

Rating and Target Price

• Enhanced capacity utilisation, backed by the government’s thrust on infrastructure development in the NER and better pricing power would entail Star to register revenue and earnings CAGR of 15% and 17%, respectively in FY23-25E.

• With declining fuel costs and other various initiatives such as implementation of 12 MW WHRS (annual savings of | 40-45 crore), installation of railway siding at its grinding plants we build in | 190/t improvement in EBITDA/t from | 1168/t in FY23 to | 1360/t by FY25E.

• We maintain BUY rating on the stock. Steady RoCE profile (14%+) and healthy balance sheet instils confidence in the business model.

• We value Star at | 185 per share (based on 11x FY25E EV/EBITDA)

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