Cement stocks are likely to be one of the top beneficiaries of the Government's thrust on infrastructure development. In fact, the Union Budget may continue to lay an emphasis on infra spend, which should benefit cement companies.
Buy the stock of Star Cement
Brokerage firm, Emkay Global has a buy call on the stock of cement player, Star Cement. The firm has set a price target of Rs 120 on the stock as against the current market price of Rs 95.
According to the brokerage Star Cement's Q3FY22 EBITDA declined 20% YoY (and 6% QoQ) to Rs675mn, 18-20% below its own consensus estimates, owing to a higher-than-expected increase in cost/ton. Accordingly, EBITDA/ton declined 41% YoY to an all-time low of Rs772 (Emkay est. Rs1,034).
Factoring in the Q3 miss and higher input cost inflation, we cut our FY22-24 EBITDA estimates by 6-14%. We also cut our fair value EV/EBITDA multiple to 9x (9.5x earlier), based on the earnings cut and marginally higher WACC/COE. We roll forward to Mar'23E (from Dec'22E) and cut our target price to Rs 120 (from Rs130).
Dominance in the North Eastern markets
Star is likely to maintain its dominance in the fast-growing North Eastern market (23% market share currently), thanks to its established presence, strong brand recall and the absence of new significant capacity additions in the region by peers. The company's net cash position and its RoIC sustaining above the cost of capital provide additional comfort, in our view. Maintain Buy.
According to Emkay Global, the management has guided for volume growth of 7% for the North East region and 6-7% for the East region in FY23.
The trade and non-trade mix stood at 86:14., while the capacity utilization of the 2mt Siliguri plant was 60% in Q3; management expects it to increase to 65% by Q4-end.
While we pick brokerage reports and highlight them, we also urge investors to remain cautious on the markets, given the increased volatility due to rising interest rates.
Also, as we usher in the Union Budget, the markets are expected to be even more volatile going ahead. Caution is therefore advised.
Investing in equities is risky and investors must therefore understand the risk. The author and Greynium Information Technologies Pvt Ltd would not be responsible for any losses caused based on the article. The author and is family do not hold shares in Star Cement mentioned above.