Buy Star Cement, target Rs 123: Anand Rathi

Anand Rathi has a buy call on Star Cement with a target price of Rs 123.

The current market price of Star Cement is Rs 88.40.

Time period given by the brokerage is one year when Star Cement price can reach the defined target.


Investment rationale by the brokerage-
Better growth prospects: Booming demand led to 14 per cent YoY volume growth, mainly from the infrastructure sector in its key north-eastern markets along with the 11 per cent YoY increase in realisation/ton to Rs 8,099. Its commanding, nearly 23 per cent, share of the market, together with premium pricing in the north-east would boost its performance. Its high, nearly 79 per cent, share in retail markets would further aid realisations. We expect a 20 per cent revenue CAGR over FY19-21.

High operating costs: In Q3 FY19, its freight costs increased 47.18 per cent YoY to Rs 777.7m; power and fuel cost rose 23.6 per cent YoY to Rs 707.6m on the use of high-priced pet-coke and the expiration of the transport subsidy. This led to a 24.9 per cent YoY fall in quarterly EBITDA/ton, to Rs 1,772. Ahead, various measures implemented in optimising costs and rationalising freight would lead to a better operational performance. We expect FY21 EBITDA/ton at Rs 1,800.

Expansions on track: The company’s coming expansion plans (Siligudi plant of 2m tons, debottlenecking clinker capacity and railway sliding) are on track. The Siligudi plant is expected to be commissioned by Q3 FY20. Capex estimated by the company is Rs 3.5bn for FY19-20.

Valuation: With its better growth prospects and operational performance, we retain our Buy rating rolling forward our target price to FY21, lowering it to Rs 123 based on 9x FY21e EV/EBITDA.

Risk: Rising operational costs.