Buy Star Ferro & Cement; target of Rs 132: ICICI Direct

Star Ferro & Cement’s Q1FY17 results were below our estimates. SFCL’s revenues increased 9.9% YoY to Rs 449.1 crore (below I-direct estimate of Rs 541.7 crore) led by 22.4% YoY increase in volumes to 0.76 MT while realisation declined 10.2% YoY to Rs 5,94.

SFCL’s utilisation has improved from 44.1% in FY13 to over 75% in FY16 led by robust demand in the North-East region (NER). We expect the same to remain healthy, going forward, given the limited available capacity in the market, it operates. The company aims to achieve market share of over 30% over the next five to seven years from current 23% (led by aggressive marketing efforts). Although we do not expect the company to maintain Rs 1,400 EBITDA/t post FY18 due to expiry of NEIIPP policy, healthy demand & pricing environment in NER region will enable the company to maintain EBITDA/t of over Rs 1000/t (in line with many large cap cement companies). Also, receipt of subsidy could act as a key trigger. Hence, we maintain our BUY rating for the stock with a revised target price of Rs 132/share (i.e. 6.0x FY18E EV/EBITDA).