Buy Star Cement Ltd for the Target Rs.280 By Emkay Global Financial Services Ltd
Robust quarter, robust momentum
Star Cement (Star) reported consolidated EBITDA at Rs1.9bn (surged ~2x YoY and down 17% QoQ), which stands above our estimate (of Rs1.63bn) due to higher-than-expected volumes and better cost control. The company reported 20% YoY volume growth, mainly on a low base (Meghalaya clinker line commissioned in Apr-24, albeit stabilized only by Q3FY25). Cement realizations (excl incentives) dipped ~2% sequentially, due to pricing weakness in the East ,in Q2, coupled with higher dispatches in the non-trade segment. Incentives stood at Rs560mn (~Rs480/t) vs Rs370mn YoY and Rs620 QoQ. On QoQ basis, tight control on variable cost offset the inflation in fixed cost which resulted in unit operating cost declining 5% YoY and standing flat QoQ. Overall, EBITDA/t stood at Rs1,620 and at Rs1,145 ex-incentives (Emkay: Rs990). On the capex front, Star has delayed the 2mtpa Jorhat GU (scheduled to commission in FY27) and greenlit the 2mtpa GU in Bihar which will be commissioned by H1FY28-end. The company shall see a unit incentive hit of Rs130-150 due to reduction of GST rates (incentive pool being linked to SGST). Further, the delay in Jorhat GU will also delay the incentive accrual in FY28E; hence, we cut FY28E EBITDA by ~10% while broadly maintaining our estimates for FY26/27. We continue to value Star at 12x EV/EBITDA on Q2FY28E (rolled forward by one quarter), while raising our TP by ~6% to Rs280 (earlier Rs265); maintain BUY.
Above-par profitability for 3 rd consecutive quarter
Star reported consolidated EBITDA at Rs1.9bn, which stood ~17% above our estimate. Stabilization of the recently commissioned Meghalaya kiln ensured i) ~20% YoY (down 9% QoQ) volume growth to 1.17mt and ii) accrued incentives of Rs560mn (~Rs480/t) in Q2FY26. Cement realization (excl incentives) grew ~2% (~Rs130/t) due to pricing weakness, particularly in Bihar and West Bengal during Q2FY26. Sharp fall in blended fuel consumption cost (Rs1.25/mn cal vs Rs1.4 QoQ) resulted in unit (RM + Power and Fuel) costs falling 11%/7% YoY/QoQ, respectively. The savings in energy costs were offset by negative operating leverage witnessed in QoQ. Overall, EBITDA/t stood at Rs1,620 vs Rs978 YoY and Rs1,761 QoQ. Excluding incentives, EBITDA/t fell to Rs1,143 vs Rs600 YoY and Rs1,283 QoQ, which still places Star among the top quartile of profitable cement companies for a 3 rd consecutive quarter.
Enough dry powder to support capacity expansion to ~18mtpa in 4-5 years
Star, currently at a capacity base of 7.7mtpa, will commission its 2mtpa GU at Silchar, Assam in Q4FY26. Following this, the company will look to commission another 2mtpa in Begusarai, Bihar at a capex of ~Rs5bn. Consequent to the Bihar project, Star shall pick up a project in Rajasthan (4/5mtpa IU expansion at ~Rs25bn capex) followed by a greenfield IU project in Umrangsho, Assam. We estimate Star’s cumulative operating cash flows at ~Rs25bn over FY26E-28E, along with likely fund raise of ~Rs15bn providing enough liquidity to support >2x capacity expansion in the next 4-5 years.
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