Star Cement (Star) has been on top of its game – evidence of which is apparent in:
1) it being a major beneficiary of the favourable demand-supply dynamics in India’s northeast (NE) region (where prices stood firm in Q4FY24 vs. a steep 8% QoQ drop in east India) – the outlook for NE remains sanguine.
2) the rationale that while capex completion shall drive 21% CAGR volume growth over FY25-FY26E, project incentives (of INR 300/t) will be an icing on the cake; and 3) its slated increase in share of green power (from 21% in FY24E to ~50% in FY26E) with greater FSA coal allocation, in tandem, will likely uplift efficiency (by ~INR 150/t). A strong debt-free balance sheet, high RoE and its imminent entry into the ‘INR 10bn-plus EBITDA club’ make for a compelling investment case.
Imminent capex benefits of volume surge and incentive accrual.
Completion of the 3.3mtpa clinker (4mtpa cement, in phases) is likely to not only drive a volume surge (21% CAGR over FY25-FY26) but also generate project incentives (SGST/IGST refund) that can catapult EBITDA/t by >INR 300. Given that these incentives will only be for a brief span, being prudent, we bake in NPV of the same into our valuation.
Star Cement Stock Recommendation and Target Price
Star is set to surpass the INR 10bn-plus EBITDA milestone in FY26E, complemented by: 1) expected cost savings of ~INR 150/t, owing to the slated jump in share of green power and increase in FSA coal allocation; 2) a strong balance sheet with net cash of ~INR 8bn in FY26E (vs. ~INR 5bn in FY23) despite capex; and 3) firm RoE of ~18% over FY25-FY26. Factoring in the multiple positives, we value Star at 11x FY26E EV/core EBITDA (ex-incentives), which yields a Target Price of Rs 271. We initiate coverage with a BUY.
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