Star Cement delivered 4th consecutive quarter of robust profit, as its EBITDA/PAT shot up 60%/173% Y-o-Y. This is led by stability of robust pricing and Star’s sales recovery in NE region, lower sales outside NE region and stable fuel costs. Thus, Star reported its best ever and industry’s best unitary EBITDA of Rs 2,280/MT. We estimate good demand to sustain Star’s unitary EBITDA at 2x industry average, bolstering cashflows (despite expiry of freight subsidy Q4FY18 onwards). Faster subsidy backlog clearance is another tailwind. We reiterate BUY with a revised TP of Rs 75. Star Cement’s stellar show continued in Q3FY18 as strong pricing (+19% YoY and +3% QoQ) drove 60% Y-o-Y EBITDA growth, even though external sales volumes declined 5% Y-o-Y (+31% QoQ). Sales in NE region rebound (+4% Y-o-Y against decline seen in preceding four quarters). Sales outside NE region fell 38% Y-o-Y (4th consecutive qtr of fall) on sales market rationalisation.
Higher utilisation QoQ amid stable fuel cost drove 12% QoQ fall in unitary opex. On Y-o-Y basis, opex remained flattish on over-head reduction and on fall in low margin sales (outside NE region). Thus, bolstered by strong pricing, Star delivered historic high (and best in industry) EBITDA of R2,280/MT (+70% YoY, +40% QoQ). Robust operating profits, coupled with lower interest expense (on debt reduction), buoyed PAT up by 173% YoY. We note that YoY earning growth should cool off Q4FY18 onwards, owing to high base effect coming in play.
However, qualitatively, Star should continue to deliver industry leading unitary EBITDA. Management guided that volume growth recovering will accelerate Q4FY18, on good demand traction in the NE region. Thus, it expects FY18 volume to decline ~5% Y-o-Y (vs 11% decline in 9MFY18) and grow at 10-15% CAGR thereafter. Strong project demand has firmed up pricing in the non-trade segment. We have cut our FY18/19 volume estimates by 9%/10% on lower offtake in 9MFY18.