Star Cement - Result Update - Profitability rebounds on better pricing, cost reduction - Centrum

Star Cement delivered a strong quarter as its consolidated EBITDA rose 34% YoY led by price recovery, operating cost moderation and one-off excise write-back which more than offset volume decline impact. With reduced competition in the NE region, improving demand outlook, lower fuel cost and Star's cost rationalisation, we expect Star to deliver 13% EBITDA CAGR during FY17-19E. Strong op cashflow, higher expected subsidy receipt and low capex during FY18/19 would reduce Star's net D:E to 0.1x in FY18E. Improving pricing outlook in the east, expected subsidy dues clearance, and the recent simplification of corporate structure should drive valuation re-rating. We maintain BUY and revise our TP to Rs129. Star Cement is expected to get listed in June 2017.

- Unitary EBITDA (adjusted) rebounds to Rs1,788/MT in Q4FY17: Star Cement reported 34% YoY EBITDA growth in Q4FY17 led by better pricing in the NE region (reported NSR increase of 10% QoQ/9% YoY, adjusted NSR increase of 3% QoQ/2% YoY), one-off excise credit in Q4FY17 (worth ~Rs370/MT), and steady opex reduction (down 6% YoY and 4% QoQ) which more than offset Star's 16% YoY volume decline (demonetisation drag and focus on better margin sales). Thus, unitary EBITDA surged 59% YoY to Rs2,158/MT and adjusted for one-off excise credit by 32% YoY to Rs1,788/MT. The company is benefiting from lower local coal prices (against the usual YoY inflationary trend seen across the cement industry in H2FY17). Further, Star is reducing its lead distance, promotional and overhead expenses, thus driving lower costs YoY.

- Margin should firm up on better pricing & demand and further cost rationalisation: Reduction in competition in the NE region and improving demand outlook (across east and NE region) should boost Star's realisation and utilisation. Further, lower coal prices in NE region and Star's effort to further trim its promotional and overhead expenses should aid margin expansion in FY18E. In FY19E, we estimate opex to increase by ~Rs436/MT, largely led by the exhaustion of freight subsidy in FY18 (both inward and outward). However, we expect the drop in unitary EBITDA to be restricted at Rs220/MT in FY19, cushioned by better realisation and operating leverage gains. Thus, we expect EBITDA to grow 27% YoY in FY18E and to remain flat YoY in FY19E. Factoring in improvement in price and opex (as shown during H2FY17), we upgrade our FY18/19 EBITDA estimates by 13%/10% respectively. Star's debtor days/cash conversion days reduced by ~11days/12days YoY in FY17 to 84days/99days.

- Smaller capex, expected subsidy receipts to boost balance sheet: Star is currently doing smaller capex - debottlenecking at Meghalaya to increase its total cement capacity by 10% in Q1FY18 and clinker capacity by 15% by FY19. The 1mn MT Siliguri grinding unit is expected by end of FY19E. These would entail total capex of ~Rs2.4bn during FY18-19. Star's total subsidy backlog currently stands at ~Rs8bn. The management is hopeful of receiving ~Rs3-4bn in FY18 on higher fund allocation (for subsidy disbursement) by the central government. It received Rs0.6bn in Q1FY18. We model in Rs3.7bn/Rs2.7bn receipts for FY18/19. Higher profits, subsidy receipts and low capex outgo over the next two years should reduce Star's net debt to 0.1x in FY18, boosting its capability for next round of capacity expansion.

Maintain BUY: We expect Star to deliver 13% EBITDA CAGR during FY17-19E despite freight subsidy getting exhausted by FY18E as pricing outlook has improved and as the company is rationalising its costs. With the completion of the reverse merger of Star Ferro & Cement in Star Cement, its corporate structure has been simplified and promoter holding has increased to 75%, thus boosting its valuation outlook. Thus, we maintain our Buy rating on Star, with a revised TP of Rs129, valuing it at 9.5x its FY19E EBITDA (Our earlier unadjusted TP stood at Rs125 (@7.5x FY19E) which implied TP of Rs95/share when adjusted for the reverse merger).

Source : Equity Bulls

Keywords