Maintain BUY on Star Cement - Healthy cash generation to fund large capex - HDFC Securities

Mr. Rajesh Ravi, Institutional Research Analyst, HDFC Securities.

Star Cement (4QFY20): Healthy cash generation to fund large capex. Maintain BUY
(TP Rs 115, CMP Rs 88, MCap Rs 36bn)

We maintain BUY on Star Cement with a TP of Rs 115. We continue to like Star for its leadership positioning in the lucrative NE region, which drives its industry leading op margin and healthy return ratios. During 4QFY20, good demand in east/NE drove 4% vol growth despite Covid lockdown. Weak pricing however led to profit decline. Even in FY20, weak pricing pulled down profits despite higher utilisation, debt reduction and higher treasury gains. Healthy OCF topped large capex and investor pay-outs (buyback/dividends) and net cash balance doubled YoY.

Good demand, stable cost in 4QFY20: Despite Covid lockdown in Mar, Star delivered 4% YoY vol growth in 4QFY20, implying healthy demand across east and NE regions. Even NSR recovered 4% QoQ on good demand traction, narrowing YoY NSR fall to 1%. Lower coal and diesel prices kept opex flat YoY and hence unitary EBITDA contracted a modest 5% YoY to Rs 1,427/MT. While consol rev rose 3% YoY, EBITDA/APAT fell 2/4% YoY.

FY20 earnings hit on lower pricing across east: Healthy demand across east drove up Star's FY20 cement sales by 7% YoY (despite covid impact). However, as its clinker sales halved YoY, total sales rose 3% YoY. NSR fell 3% on volatile regional pricing. Even input cost went up on higher fuel cost in FY20. Asset sweating however flattened opex rise to 1% YoY, moderating unitary EBITDA fall to 15% to Rs 1,337/MT. Thus, while consol EBITDA fell 12% YoY, lower int cost and surge in treasury gain slowed APAT fall to 4%.

Healthy op cash to support its ongoing expansions: During FY20, Star fast-tracked work on its 2mn MT SGU in Siliguri and capex spend surged to 2.3bn (its highest ever). Healthy OCF of Rs 5.1bn topped capex, buyback of Rs 1bn and div payout of Rs 0.5bn. Thus, net cash doubled to Rs 2.7bn. The Siliguri plant is expected to be operational in 3QFY21 (delayed due to Covid, Rs 0.8bn capex pending in FY21). In FY21, Star will also spend Rs 1bn towards its planned 2mn MT brown-field clinker expansion in Meghalaya (by FY23E, EC awaited), Rs 0.7bn on 12MW WHRS (by end FY22). Overall, Star would be incurring ~Rs 4bn each during FY21-23E, all of which should be funded through internal accruals and hence co should remain net cash.

Maintain BUY: The ongoing capex will increase Star's clinker/cement capacity to 5/5.7mn MT by FY23E. We expect 12% consol vol CAGR during FY20-22E driven by capacity ramp-up in east. This should drive 13/12% consol EBITDA/APAT CAGR. We continue to like Star for its leadership positioning in the lucrative NE region, which drives its industry leading op margin and healthy return ratios. We maintain BUY with a revised TP of Rs 115/sh (9x FY22E consol EBITDA, inline its long term mean multiple).

Shares of Star Cement Ltd was last trading in BSE at Rs.86.7 as compared to the previous close of Rs. 86.3. The total number of shares traded during the day was 6209 in over 319 trades.

The stock hit an intraday high of Rs. 87.4 and intraday low of 85.75. The net turnover during the day was Rs. 537177.

Source : Equity Bulls

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