Buy Star Cement; target of Rs 262: Asit C Mehta

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Asit C Mehta report on Star Cement

STRCEM reported a mixed set of numbers, EBITDA and blended realisation in line with our estimate, while revenue and volume are marginally ahead of our estimate. Revenue up by 10.1% YoY (+40.2% QoQ) to Rs9.13bn, mainly led by 13.8% YoY (+43.7% QoQ) increase in volume of 1.41mt (1.387mt cement + 0.024mt clinker) sales. However, realisation was down by 3.3% YoY and 2.4% QoQ to Rs6474. EBITDA in absolute number stood at Rs1.8bn (+8.1% YoY, +20.8% QoQ) and EBITDA margin stood at 19.7% in Q4FY24 vs. 20%/22.8% in Q4FY23/Q3FY24, respectively. EBITDA/tn was down by 5% YoY and 15.9% QoQ to Rs1274 due to lower realisation, higher logistics cost coupled with increase in raw material cost. Overall opex per tonne is down by 2.8% YoY, but increased by 1.6% QoQ. P&F cost per tonne was down (-38.5% YoY, -39% QoQ) and employee cost per tonne was down (-13.7% YoY, -30.1% QoQ). PAT stood at Rs877mn (-8.8% YoY, +19.2% QoQ). The YoY decline in PAT was due to higher depreciation charges because of growth capex during the quarter (new GU + clinker unit) coupled with higher interest and tax expenses. In addition, the company is adding 2mtpa new cement grinding unit at Silchar in Assam, expected to commission in Sep’25. We see a volume growth of 20% CAGR over FY24–FY26E at an average capacity utilisation of 67%. We expect Revenue/EBITDA/PAT growth of 21%/28%/44% CAGR over FY24–FY26E.

Outlook

At CMP Rs220, the stock trades at ~16x/~13x/~10x FY24/25E/26E EV/EBITDA. It traded at an average EV/EBITDA of ~11x in the last six years. With an improvement in profitability, return ratios & balance sheet and a continued focus on capacity addition, we expect it to trade at higher-than-historical multiples, going forward. We value the company at 10x FY26E EV/EBITDA to arrive at a target price of Rs262 (an upside of 19%) maintain with BUY rating. While, delay in capex plan and incentive, slower-than-expected demand, regional pricing pressure from new entrant are key downside risks to our call.

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Star Cement