Buy Star Cement Ltd for the Target Rs 230 by Emkay Global Financial Services Ltd
Star Cement (Star) posted consolidated EBITDA of Rs1.53bn (down 19%/21% yoy/qoq), in line with Emkay/street estimates. However, ex incentives, EBITDA missed our estimate by ~7%. Total volume grew a mere 2% yoy, likely due to heavy rainfall and floods in the Northeast (NE) during 2Q. Unit cost rose ~2% qoq (Rs134/t), as negative operating leverage increased fixed cost by Rs229/t qoq, which was partly offset by the lower RM+P&F (Rs46/t) and freight (Rs49/t) costs. Consequently, EBITDA/t stood at Rs1,281 (Emkay: Rs1,258) vs Rs1,620 yoy and Rs1,436 qoq. Ex-incentives, EBITDA/t was Rs981 (Emkay: Rs1,040) vs Rs1,143 yoy and Rs1,259 qoq. Our view: Star’s margin, which stood below Rs1,000/t in 2Q, albeit lower than recent margin levels (>Rs1,200), continues being the highest among peers in 2Q too. We see margin recovering to >Rs1,300 (ex-incentives) on the back of ramp-up of the Silchar GU and better realization. We retain estimates and continue to value Star at 10x 2QFY29E core EBITDA; our TP at Rs230 is unchanged. Following the recent correction, the stock trades at attractive valuation of 8x 1YF EV/EBITDA; hence, we anticipate a quick stock price correction as crude oil turns benign; BUY.
Core EBITDA/t slips below Rs1,000 on negative operating leverage
Star reported consolidated revenue of Rs8.3bn (up 2.5% yoy, down 12% qoq), due to weak volume growth of 2% yoy amid heavy rainfall and floods in the Northeast. Cement realization (ex-incentives) declined ~3% qoq (Rs196/t) on weak demand in the eastern region. Blended realization stood flat qoq, as incentive accruals rose to Rs360mn (vs Rs240mn in 1QFY27) and AAC block revenue grew ~28% qoq to ~Rs200mn. On the cost front, (RM+P&F)/t eased ~2% qoq (Rs46) and freight cost/t fell ~4% qoq (Rs49); as a result, variable cost/t dipped ~2% qoq (Rs95/t). Fixed cost/t rose ~15% qoq (Rs229/t) on negative operating leverage, taking up the total unit cost by ~2% qoq (Rs134/t). Core EBITDA/t (ex-incentives) fell to Rs981 (Emkay: Rs1,040) from Rs1,143/Rs1,259. EBITDA declined 19%/21% yoy/qoq to Rs1.53bn, and PAT came in at Rs396mn, down 44%/46% yoy/qoq. Star declared interim dividend of Re1/sh.
Expansion to be funded via accruals and debt; fund-raise shelved
Star targets 14.7mtpa by FY29 via its 3mtpa IU at Nimbol, Rajasthan and its 2mtpa GU at Jhajjar, Haryana, at total capex of ~Rs31bn. Having shelved the Rs15bn fund-raise approved in Nov-25, it will fund these via internal accruals and debt (targets net debt/EBITDA at 2x yoy at Rs3.6bn, aided by working-capital efficiency. After capex of ~Rs2bn, FCF of ~Rs1.5bn comfortably covered ~Rs350mn of interest and lease payments. The surplus and ~Rs1.1bn of net borrowings were parked in deposits and investments. As a result, net debt eased to ~Rs1bn as of Sep-26 vs ~Rs2.2bn as of Mar-26. We expect net debt/EBITDA to peak at ~1.3x in FY28E as expansion capex increases.
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