Axis Securities has given a buy call to Star Cement Limited in its Axis Annual Analysis report published on 28th November 2022. The brokerage suggests buy the stock of the company with a target price of Rs 115 per share. The stock with the given target price has the potential to give up to 12% gains if the stock is purchased today at the current market price. Star Cement is a small-cap Cement sector company having a market capitalisation of Rs 4,185.29 crore.
Star Cement is one of the prominent Indian cement companies with East India operations. The company is the largest cement manufacturer in the North-Eastern Indian region and is also an emerging player in the states of West Bengal and Bihar. The company's Lumshnong plant, spread across 200 hectares of land is strategically located in Meghalaya, ensuring easy availability of high-grade limestone at competitive rates.
Stock Outlook & Returns
The stock at the time of writing is trading at Rs 103.25 per share on NSE, 0.78% up as compared to its previous close. Today, it opened at Rs 103 per share. Its 52-week high level is Rs 113.70 apiece, and its 52-week high level is Rs 81, respectively.
The stock in 1 week surged 0.54% and in 1 month it fell by 0.43%, respectively. Over the past 3 months, it gave 10.12% positive returns. Whereas, over the past 1 year, it has given an 8.68% positive return. In 3 years, it gave 10.83% positive return. In the past 5 years, it gave 16.79% negative returns.
Capacity Expansion to Drive Growth; Outlook Remains Positive
The company reported consolidated revenue of Rs 2,221 Cr in FY22, registering a robust growth of 29% YoY. This was primarily on account of the new capacity ramp-up of it Siliguri Grinding unit which was commercialized in FY21. The company posted an EBITDA of Rs 345 Cr, up 4% YoY. EBITDA growth was impacted by elevated input costs during the year.
The company's volume grew by 29% YoY to 3.40 mtpa, led by higher demand and new capacity ramp-up during the year. The capacity utilization of the Siliguri Grinding unit stood at an encouraging 70% in the later part of FY22, significantly up from 32% in Q1FY22. While continuing with its strategy of focusing on the Northeast market where it's a market leader, the company undertook several marketing initiatives in FY22 to augment its sales from the new grinding unit. Consequently, the East India region's contribution to total sales increased to 25% from 20% in FY21. The company sold 2.5 mtpa and 0.85 mtpa in North-East and East regions respectively in FY22.
On the Capex front, the company is setting up a 3-mtpa Clinker Unit at the Meghalaya facility along with a 12 MW WHRS plant. Furthermore, it is also planning to set up a 2-mtpa grinding unit in Assam which will get commissioned in phases over FY24-25. The company has earmarked Rs 2,000-2,200 Cr for expansion-related Capex for the next two-three years.
Blended realization improves: During the year, the company reported trade sales at 86% and the balance was non-trade. Blended realization improved marginally by 0.5% during the year to Rs6,525/tonne. Blended cement sale was above 90% during the year.
Proactive initiatives to expand digital footprint: On the digital front, the company has taken broad steps in expanding its digital footprint by introducing various applications to strengthen its sales force, dealers, channel partners and contractors.
Healthy liquidity position and debt-free balance sheet: In light of challenging operating and business conditions imposed by the COVID-19 disruptions, the company ensured its stability and business continuity by maintaining a robust cash position. Furthermore, it transitioned from being a leveraged company to an almost debt-free company. It maintained a healthy liquidity position with adequate cash & cash equivalent and a bank balance totalling Rs 400 Cr during the year.
Competitive Strengths, Strategies, Growth Drivers, & Focus Areas
1. Key Competitive Strengths: a) Largest cement producer in the NER region with 23% market share; b) Strong entry barriers created by the regional demography, which supports the company in maintaining a healthy market share; c) Access to limestone mines within 2-3 kilometres of plants location, enabling competitive logistical costs; d) Robust financial position, and e) Strong dealers and distribution network in its operating regions, facilitating extensive market coverage.
2. Strategies Implemented: a) Ramping up capacity utilization of Siliguri grinding unit; b) Strengthened brand recall by undertaking value-enhancing promotions; c) Focused on cost optimization and value creation, and d) Continued digitalization of processes using AI, IoT, SAP, and Machine learning.
3. Growth Drivers: a) Increasing overall cement demand in its key operating regions; b)High consumption in the Eastern and North-Eastern regions; c) Augmenting railway infrastructure; d) Supportive initiatives by the proactive government.
4. Key Focus Areas Moving Forward: a) Increasing brand recall; b) Innovating products to further-consolidate customer trust and market share; c) Expanding capacity to cater to increasing demand; d) Widening geographical footprint in theNorth-Eastern to the Eastern regions; e) Investing in green technology for a sustainable tomorrow; f) Undertaking backward integration into captive power generation and cost optimization measures; g) Improving logistics and reducing costs.
Outlook & Recommendation
According to the brokerage, Cement demand is expected to be robust both in North-East and East regions driving the volume growth for the company. Its Siliguri grinding unit is ramping up well and higher capacity utilization of the unit will help the company in improving its fixed cost absorption and will also aid in its volume growth moving ahead. "With better cement demand, higher pricing, stabilization of the Siliguri Grinding unit, and cost optimization measures (12mw WHRS plant) undertaken by the company, we foresee Star Cement reporting decent performance moving ahead. The stock is currently trading at 9x FY23E and 8x FY24E EV/EBITDA. We retain our BUY rating on the stock and value the company at 9x FY24E EV/EBITDA to arrive at a TP of Rs 115/share, implying an upside of 11% from the CMP," the brokerage has said.
The stock has been picked from the brokerage report of Axis Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.