Key highlights of 3QFY24 result
Strong growth in premium cement sales and low-cost fuel inventory drove operating margins higher; Volume growth remained decent amid stable demand environment: Star Cement Ltd (SCL) reported decent sales growth of 5.5% YoY at Rs 651 cr driven by an underlying sales volume growth of 6.1% YoY at 1.0 mn tonnes. The sales growth was partially offset by muted cement prices which led to a marginal decline of 0.5% YoY in realization at Rs 6,764 per ton. EBITDA and PAT grew 37.2%/39.0% YoY to Rs 149 cr/Rs 74 cr respectively. The EBITDA margin expanded 527 bps YoY to 22.8% aided by consumption of low-cost fuel inventory and increase in the share of premium cement sales to 6.5% vs. 4.5% in 3QFY23. Strong growth of 40% YoY in premium cement sales also contributed in robust margin expansion. The average fuel cost during the quarter stood at Rs 1.75 per kcal and is expected to come down to Rs 1.7 per kcal in 4QFY24.
Capex Update: SCL started the commercial trial of Guwahati grinding unit (GU) of 2 MTPA during the quarter. This facility will lead to SGST benefit of Rs 150-160 cr (Rs 800 per ton) per annum for 5-6 years. Clinker capacity of 3 MTPA will be started by March or April month against its targeted commencement timeline of Feb’24. The timeline to complete its greenfield expansion of Silchar plant is targeted by 3QFY25. The company is focused on land acquisition (cost of Rs 20 cr) for Silchar plant. The capex cost for this expansion is reduced to Rs 450 cr vs. Rs 500 cr earlier due to reduction in cost of steel and other items. Post commissioning all the capex, SCL’s total clinker/cement capacity will expand to 5.8/9.7 MTPA from 2.8/7.7 MTPA at present. The full capacities are likely to get added by FY26.
Guidance & Outlook: The management has alluded subdued demand for 4QFY24 due to slowdown in construction activities. However, management expects 4QFY24 volume growth to be 8-10% vs. 5-7% industry volume growth expectations. With commissioning of the Guwahati GU, SCL expects FY25 volume growth to be 18-20%. Moreover, the company is looking to diversify and is in the process of buying mines in Rajasthan and South market. SCL is looking to add ~2.5 MTPA clinker and cement plant in Rajasthan, the capex for which can be ~Rs 2,500 cr. The company intends to fund this capex from internal accruals and might also make plans to raise money from market. SCL targets 20 MTPA capacity by 2030 end.
Accumulate for price target of Rs 240: We continue to like Star Cement given its established track record in one of the fastest growing cement markets of North-East and East. Its medium-term plan to diversify outside North-East and East also looks prudent. Factoring in slightly muted sales growth for 4QFY24, we have reduced our sales estimates for FY24E/FY25E by 4.0%/6.4% respectively and have raised EPS estimates by 16.1%/6.2% for the same period respectively on continued benefit of low input cost. We maintain our coverage on the stock with Accumulate rating and upgrade our target price to Rs 240 valuing the stock at 12.1x of EV/EBITDA multiple, which implies an upside potential of 17.1% for 12-18 months.