Buy Star Ferro & Cement; target of Rs 130: Centrum

SFCL delivered 7% YoY consolidated EBITDA growth after three consecutive quarters of decline led by strong volume growth (+24% YoY), lower costs (-4% YoY) amid poor pricing (-5% YoY). We expect profit growth to improve going ahead led by increasing utilisation & plant efficiency, lower coal cost, stable overheads and expected price recovery from H2FY17. Receipt of subsidy backlog (50% of dues expected in H2FY17) should further enhance SFCL’s balance sheet. SFCL’s reverse-merger with Star Cement (by end of FY17) will simplify corporate structure without any equity dilution. Maintain BUY with revised TP of Rs 130.

We cut our EBITDA estimates for FY17E/18E by 17%/14% each as we lower our NSR estimates for FY17/18 by 4%/5% respectively. We also build in 0.5% reduction in FY18 opex/MT to factor in lower coal prices and increasing cost efficiencies. SFCL expects to maintain strong volume offtake during FY17/18 led by pick-up in demand from both retail (rural demand recovery post good monsoon) and infrastructure (government projects) segments. We expect cement prices to recover H2FY17 onwards led by better demand and recovery in supply discipline. We lower our TP to Rs130 from Rs 150 earlier (valuing SFCL’s 70.5% holding in the cement business at 7.5x its FY18E EBITDA), factoring in estimates reduction. We retain BUY. We expect cement price recovery in east, the long due subsidy receipt from the government and corporate structure simplification to trigger valuation rerating for SFCL. Key downside risks are continued weak pricing in east, further delays in subsidy receipt and sharp rise in input costs.