Elara Capital

Star Cement (Buy)

CMP: ₹92

Target: ₹147

Star Cement (SCL) is market leader in North-east region (NER), with about 22 per cent share as on FY18. NER accounted for about 85 per cent of capacity versus about 15 per cent for its closest listed peer, Dalmia Bharat. The nearest limestone cluster is 1,000 km away, making it unviable to service the region.

Since April 2017, there has been no new orders in NER. Based on existing clinker capacity of 7.5 million tonne, possible total cement supply is expected to be about 10 million tonne versus FY18 consumption of 7.9 million tonne, as per our channel checks. We expect cement demand CAGR of 13 per cent over FY18-20E, thereby bridging the demand-supply mismatch

Top two firms — Star Cement and Dalmia Bharat — control 65 per cent of capacity as on FY18 while Top Cement, which accounts for 10 per cent, make it 75 per cent. Due to these high levels of consolidation, NER has not seen pricing disturbances in the past 20 months. We initiate on SCL with a ‘Buy’ rating and a TP of ₹147 on FY21E EV per tonne of $121.

SCL should benefit from strong demand growth and reducing demand-supply gap in NER.

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