Buy Star Cement Ltd for the Target Rs 300 by Emkay Global Financial Services Ltd
Star Cement (Star) posted consolidated EBITDA of Rs1.95bn (down 15%/38% yoy/qoq), in line with our estimate. Star logged 4.5% yoy volume growth (down 22% qoq on seasonality, compounded by election-led demand disruption in the quarter in Assam and West Bengal). Cement realization (ex-incentive accruals) rose 3% qoq (2.5% above our estimate), led by price improvement in the Northeast (NE) and East over Apr/May-26. Unit (RM+P&F) costs rose 10% qoq, likely, due to rise in blended fuel costs on rake shortage and higher e-auction coal prices. Further, we believe expensive packing bags and negative operating leverage pushed unit fixed costs up 11%/25% yoy/qoq, increasing total unit operating costs 5%/12% yoy/qoq. Overall, EBITDA/t stood at Rs1,436 (Emkay: Rs1,484) vs Rs1,761 yoy and Rs1,818 qoq. Our view: We believe Star witnessed the dual impact of lower volumes and higher costs in 1Q. Despite the sequential dent in margins, Star maintains its streak of highest profitability (highest EBITDA/t, excluding incentive income). Further, we expect the cost trajectory to peak in 2QFY27 and normalize in 2HFY27 as the Silchar GU ramps up, keeping the volume trajectory intact. We broadly maintain FY27E/FY28E EBITDA and continue to value Star at 12x EV/EBITDA, rolling forward to 1QFY29E (from FY28E) with unchanged TP of Rs300. At FY28E EV/EBITDA of ~9x and EV/t of~$83, we see STAR trading at lucrative levels; maintain BUY.
State elections in core regions hurt volumes; costs swell due to expensive fuel
Star's consolidated EBITDA came in at Rs1.95bn, in line with our estimate (Rs2bn). Revenue grew 3% yoy but declined 20% qoq, as volumes rose 4.5% yoy but fell 22% qoq volume. We believe state elections in Assam and West Bengal during the quarter impacted volume buoyancy. Cement realization (ex-incentive accruals) improved 3% sequentially. Incentive accruals for the quarter stood at ~Rs240mn (~Rs175/t) while non-cement revenue stood at ~Rs155mn. Unit (RM+P&F) costs rose 10% qoq, likely due to rise in blended fuel costs on rake shortage and higher e-auction coal prices. Unit freight cost rose 4%/2% yoy/qoq, likely owing to higher lead price and increase in diesel prices in May/Jun. Consequently, EBITDA/t stood at Rs1,436 (vs Rs1,761/Rs1,818 yoy/qoq), and ex-incentive EBITDA/t was Rs1,259 (vs Rs1,283/Rs1,622 yoy/qoq); thus, we place Star at the top of the profitability chart among cement peers for a 6 th straight quarter.
Healthy balance sheet to support capex of ~17mtpa (1.7x) in ~3 years
Star, with current capacity base of 9.7mtpa, aims to achieve installed capacity of ~17mtpa by FY29. Star is likely to pick up a project in Rajasthan (5mtpa IU expansion at ~Rs29bn capex), followed by a 2mtpa GU in Begusarai, Bihar, at capex of ~Rs6.5bn. We estimate Star’s cumulative operating cash flows at ~Rs26bn over FY27E-29E against a capex cash outflow of ~Rs33.5bn over the same period. Accordingly, we expect net debt-to-EBITDA to remain comfortable at ~1x in FY29E vs 0.2x in FY26.
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