Leadership in NE makes for good prospects

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Published: September 23, 2017 2:56:16 AM

Star Cement is the largest player in NE, with 23% market share. Driven by the government’s thrust in the region and no new capacities being added, we expect the demand to grow 7-8% annually with pricing being supportive.

Star Cement, NEStar Cement is the largest player in NE, with 23% market share. Driven by the government’s thrust in the region and no new capacities being added, we expect the demand to grow 7-8% annually with pricing being supportive. (Representative Image: IE)

Star Cement is the largest player in NE, with 23% market share. Driven by the government’s thrust in the region and no new capacities being added, we expect the demand to grow 7-8% annually with pricing being supportive. Star Cement has highest Ebitda/ton in the industry due to higher realisations and subsidies. We believe the stock is cheap at 8x Sep-19 EV/Ebitda, given superior profitability and RoE’s profile. Initiate with Buy and TP of Rs 137 (26% upside). 23% market share in NE: Star Cement is the largest organised cement player in North East, among 3 players controlling 55%-60% of the market. It has steadily improved its market share in the region from 19% in FY10 to 23% in FY17.

Highest Ebitda/ton in the industry: Due to 40-50% higher-than-market realisation in the NE but costs being only 35% higher, Star Cement made Rs 1,429 Ebitda/ton in FY17. Given no capacity additions are planned in the region, we expect the realisation and profitability to be maintained/improve. Valuation: Due to restructuring and lack of long trading history for cement business, we use a 10x Sep-19 EV/Ebitda multiple (in line with average of midcaps) for stock on normalised Ebitda pre-subsidy. Downside risk: Low demand and weakness in realisations.

 

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