This cement stock has underperformed Sensex since listing; will tides turn?

Analysts see up to 23 per cent upside in the stock over its last close of Rs 102.30

Ever since its listing in June 2017, the stock of Star Cement has consistently underperformed BSE barometer Sensex for each of the years, leading up to 2020. After posting double-digit negative returns in the years 2018 and 2019, the company managed to rally over 12 per cent in 2020 but even then fell short of nearly 16 per cent returns offered by Sensex.

However, analysts believe the tide may turn for the firm as the company's strong presence in the North-Eastern region with high entry barriers, expansion in the Eastern markets and healthy financials make it an attractive bet, giving it a potential upside of up to 23 per cent over its last close of Rs 102.30.

Star Cement holds 25 per cent of the total market share of the North-Eastern region which contributes 75 per cent to its revenues. According to an analysis by Axis Securities, the cement demand in the region has grown at 8 per cent compounded annual growth rate (CAGR) over the past three years and is expected to grow further as the region has the lowest per capita consumption of cement in India, and on the back of housing and infra activities undertaken by the government.

Integrated nature of operation and proximity to raw material resources, analysts say, helped Star Cement maintain its premium position in the North-Eastern region and turn out to be more profitable than peers.

Now, the company is trying to build on its presence in the Eastern region with a new grinding unit in West Bengal which will increase the firm's cement capacity to 5.7 million mt. The move, a report by Nirmal Bang Institutional Equities says will ensure consistent volume growth as the company plans to increase capacity to 10 million mt from the current 5.7 million mt (post-expansion capacity) by 2025.

Financial position
 

Healthy quarterly results, sustained rural demand and opening up of the economy, which has fared well for the realty sector and related business, have improved the outlook for the cement sector. While the demand is expected to moderate in the third quarter of FY21, the performance is expected to be stronger for cement companies as weak base prices will imply better realisation gains, a report by Centrum Broking said.

"Continuing with the current prices in the fourth quarter, however, will impact margins of the companies. But strong earnings in the first nine months of FY21 will help cement companies to maintain healthy revenues and operating income," it added.

Star Cement posted 4.7 per cent year-on-year (YoY) and 34.17 per cent quarter-on-quarter (QoQ) growth in its consolidated income at Rs 408.48 crore for the quarter ended September 2020. Consolidated profit for the same period grew 35.6 per cent YoY and 38.96 per cent QoQ to Rs 61.47 crore. While capital for the ongoing capacity expansion has been met out of the internal accruals of the company, analysts believe the company has sufficient liquidity to meet any incremental capex going forward.

"The company exhibits a healthy financial position with nearly debt-free status, high-interest coverage ratio and strong return ratios. The debt-free nature of the company with a corresponding manufacturing capacity of 4.3 million tonnes per annum makes it one of a kind in the country’s cash-intensive cement sector," said a report by Axis Securities.

Meanwhile, analysts at Nirmal Bang Institutional Equities are building in 14 per cent and 16 per cent revenue and EBITDA CAGR, respectively, for the company over FY21-23, driven by increased volume from the East post the recent capacity expansion. The brokerage has a 'BUY' rating on the stock with a target price of Rs 127.

Analysts at Axis Securities, Elara Capital and HDFC Securities, too, have 'BUY' ratings on the stock with target prices of Rs 115, Rs 119 and Rs 125, respectively. While Centrum Broking is bullish on the stock, its target price of Rs 98 was met last week.

That said, subdued pricing and inability to ramp-up utilization of new grinding unit, coupled with delays in clinker expansion plans in Meghalaya could act as key downside risks to the stock rally, Nirmal Bang report said.