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ICICI Direct Report
Key Investment Thesis:
Expanding capacity to strengthen market share:
Star Cement Ltd. has embarked on a journey to further strengthen its market share in North Eastern Region to 30% plus (from current 25%) by FY26E by more than doubling its capacity. Company is setting up a three million tonne clinker unit with 12 mega watt waste heat recovery system at Meghalaya (capex: Rs 1300 crore, completion: January 2024) and two grinding units of two million tonne each in Assam (capex: Rs 800 crore, completion: Guwahati in Dec 23 and Silchar in August 2024).
Post the expansion, company's overall clinker and cement capacity will increase to 5.8 and 9.7 mt, respectively by FY25E. The cost of project stands at $ 67/tonne which is ~ 33% lower than industry replacement cost.
Robust balance sheet to support aggressive capex plans:
Star Cement has a consistent cash generation profile with company recording cumulative operating cashflows worth ~Rs 2800 crore during FY18-23 (average CFO/Ebitda: 105%).
It has a cash rich balance sheet with investment of ~Rs 485 crore. Going forward, we expect company to generate ~ Rs 1400 crore cumulative operating cash flow during FY23-25E which would assist funding its capex requirements (Rs 2300 crore).
We expect the leverage to remain low at 0.2 times with peak debt levels of Rs 550 crore in FY24E.
Rating and Target Price
Enhanced capacity utilisation, backed by the government's thrust on infrastructure development in the north eastern region and better pricing power would entail Star to register revenue and earnings compound annual growth rate of 15% and 17%, respectively in FY23-25E.
With declining fuel costs and other various initiatives such as implementation of 12 mw WHRS (annual savings of Rs 40-45 crore), installation of railway siding at its grinding plants we build in Rs 190/tonne improvement in Ebitda/tonne from Rs 1168/tonne in FY23 to Rs 1360/tonne by FY25E.
We maintain 'Buy' rating on the stock. Steady return on capital employed profile (14% plus) and healthy balance sheet instils confidence in the business model.
We value Star Cement at Rs 185 per share (based on 11 times FY25E enterprise value/Ebitda).
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