Buy Star Cement Ltd For Target Rs. 265 By Emkay Global Financial Services Ltd
Star Cement (Star) reported consolidated EBITDA at Rs2.3bn (surged ~2x YoY and down 13% QoQ), which stands above our estimate (of Rs2.1bn). The company’s now stabilized new clinker line at Meghalaya enabled volume growth of ~12% YoY. Cement realizations (excl incentives) grew ~3% sequentially, while incentives stood at Rs620mn (~Rs480/t) vs Rs50mn YoY and Rs750 QoQ. Total operating cost/t decreased 4% YoY, though inflating slightly by ~2% QoQ mainly due to negative operating leverage. Overall, EBITDA/t stood at Rs1,760 and Rs1,280, excl incentives (Emkay: Rs1,264). On the capex front, Star is on track to achieve ~12mtpa by FY27E led by commissioning of 2mtpa GUs each, at Silchar and Jorhat, Assam. Given the higher-than-expected incentive accrual in Q1FY26, we increase average incentive run-rate to ~Rs 2.3bnpa (earlier ~Rs2bn) over FY26E-28E. Further, based on our checks, cement prices have seen a negligible dip the in Northeast and East, in Q2FY26TD. Hence, factoring in both the aforementioned, we raise FY26E/FY27E EBITDA by ~9%/3%, respectively. We continue to value Star at 12x EV/EBITDA on Jun-27E EV/EBITDA, while raising our TP by 6% to Rs265 (earlier Rs250); maintain BUY.
Above par profitability for 2nd consecutive quarter
Star reported consolidated EBITDA at Rs2.3bn, viz ~2x YoY and ~10% above our estimate. Stabilization of the recently commissioned Meghalaya kiln ensured i) ~12% YoY (down 15% QoQ) volume growth to 1.3mt and ii) accrued incentives of Rs620mn (~Rs480/t) in Q1FY26. Cement realization (excl incentives) grew ~3% (~Rs180/t) on the back of the prevailing strong pricing scenario in Star’s core market—Northeast— during the quarter. We believe that owing to consumption of high-cost fuel inventory during the quarter, unit RM + Power and fuel costs inflated ~4% QoQ. Meanwhile, fixed cost/t was down 3% YoY albeit up 6% QoQ, mainly due to negative operating leverage. Overall, EBITDA/t stood at Rs1,761 vs Rs1,006 YoY and Rs1,715 QoQ. Excluding the incentives, EBITDA/t fell to Rs1,283 vs Rs963 YoY and Rs1,225 QoQ, which still places Star among the top quartile of profitable cement companies for a 2nd consecutive quarter.
Strong cash flow ensures disciplined balance sheet amid capacity expansion
We estimate Star’s cumulative operating cash flows over FY26E-28E at ~Rs25bn as against total capex outflow of Rs18bn, thus ensuring that Star would turn net cash positive by FY27E-end. Further, it allows Star to opt for large capacity expansion (planned ~4.5mtpa IU expansion in Rajasthan), with major funding through internal accruals. Star shall achieve cement capacity of ~16mtpa (~2x of current capacity) in ~5 years, with completion of the Rajasthan project. Excl incentives, we estimate Star’s EBITDA/t at Rs1,237, Rs1,265, and Rs1,314 in FY26E, FY27E, and FY28E, respectively, and see its RoE rising to the 13-14% range in the medium term vs ~6% in FY25.
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
