Silchar And Jorhat Projects Will Expand Capacity And Improve Future Earnings Potential

Key Takeaways

• Increased clinker capacity and infrastructure demand in the Northeast will boost revenue and support sustained volume growth.
  
• Efficiency improvements in clinker production and energy costs will enhance net margins and future earnings potential.
  
• Declining margins and increased competition, combined with high capital expenditure and uncertain demand, pose risks to Star Cement's future earnings and financial stability.

Catalysts

Manufactures and sells cement and clinker products in India and internationally.

• Star Cement anticipates a volume growth of 12% to 15% next year, supported by increased clinker production capacity and strong infrastructure demand in the Northeast, which should positively impact revenue growth.
  
• The company expects to stabilize its new clinker production line, reducing shutdown and external clinker purchasing costs, which will likely improve net margins.
  
• Upcoming new projects, such as the Silchar and Jorhat grinding units, are expected to be commissioned by FY '26 and FY '27, expanding capacity and enhancing future earnings potential.
  
• The commissioning of a new Waste Heat Recovery System (WHRS) in the current quarter is expected to lower energy costs, potentially contributing to improved net margins.
  
• With the central government’s infrastructure development plans in the Northeast, including ₹1 lakh crore investment, Star Cement is positioned to benefit from increased demand, supporting revenue and earnings growth.

Star Cement Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Star Cement's revenue will grow by 15.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 11.5% in 3 years time.
• Analysts expect earnings to reach ₹5.4 billion (and earnings per share of ₹13.19) by about April 2028, up from ₹1.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.3x on those 2028 earnings, down from 67.1x today. This future PE is lower than the current PE for the IN Basic Materials industry at 31.9x.
• Analysts expect the number of shares outstanding to grow by 1.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.56%, as per the Simply Wall St company report.

Star Cement Future Earnings Per Share Growth

Risks

• Decreased EBITDA and PAT: Despite an increase in revenue, both EBITDA and PAT have decreased compared to the previous year, primarily due to increased depreciation from new capitalizations, which could negatively impact net margins and earnings.
  
• Clinker Stabilization Issues: The company faced issues with stabilizing its new clinker line, leading to one-off costs for purchasing clinker externally and maintenance shutdowns, which affected profitability and could impact future earnings if such issues persist.
  
• Increased Competition: There is potential increased competition with upcoming expansions by major players in the region such as Dalmia, which could lead to pricing pressures and influence revenue and margins.
  
• High CapEx Plans: The company has significant future CapEx plans for expanding capacity, which might strain financial resources and could be risky if projected demand growth does not materialize, impacting future earnings and return on capital.
  
• Market Demand Risks: The Northeast market, a primary revenue source, has seen flattish demand growth, and while future growth is expected, it remains uncertain. Any continued weakness in market demand could adversely affect revenue growth projections.

Valuation

• The analysts have a consensus price target of ₹226.1 for Star Cement based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹270.0, and the most bearish reporting a price target of just ₹118.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹46.8 billion, earnings will come to ₹5.4 billion, and it would be trading on a PE ratio of 26.3x, assuming you use a discount rate of 13.6%.
• Given the current share price of ₹221.65, the analyst price target of ₹226.1 is 2.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.