Clinker Capacity Expansion And WHRS Will Drive Future Efficiencies

Key Takeaways

• Expansion in clinker capacity and waste heat recovery systems will improve operational efficiency, boosting revenue and EBITDA margins.
  
• Infrastructure investments and increased premium cement sales are expected to drive demand and enhance margin profiles.
  
• Increased operational costs and competitive pressures are straining Star Cement's profitability, challenging its financial sustainability and future revenue growth.

Catalysts

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

• The recent expansion in clinker and grinding capacity is expected to drive volume growth, particularly with expected increases of 7-8% for the full year and 12-15% for the next year, enhancing revenue prospects.
  
• The stabilization of the new clinker unit and reduced dependency on costly clinker purchases from external sources are anticipated to improve operational efficiencies and boost net margins.
  
• The commissioning of new Waste Heat Recovery Systems (WHRS) is set to reduce power costs, potentially increasing EBITDA margins in future quarters.
  
• Continued infrastructure investments in the Northeast region by the government are expected to spur demand, supporting revenue growth and providing broader market opportunities for the company.
  
• The focus on increasing premium cement sales, which rose from 9% to 12%, could lead to enhanced margin profiles given the higher price realizations associated with premium product segments.

Star Cement Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Star Cement's revenue will grow by 15.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 12.3% in 3 years time.
• Analysts expect earnings to reach ₹5.7 billion (and earnings per share of ₹14.07) by about February 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 25.1x on those 2028 earnings, down from 65.5x today. This future PE is lower than the current PE for the IN Basic Materials industry at 31.0x.
• 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 14.09%, as per the Simply Wall St company report.

Star Cement Future Earnings Per Share Growth

Risks

• The decrease in profit after tax (PAT) to ₹9 crores from ₹74 crores in the same period last year, due to increased depreciation from capital investments, indicates a strain on net margins and overall earnings.
  
• The company's EBITDA per tonne has dropped significantly to ₹1,000 from ₹1,576 in the previous year, which could adversely impact the profitability and financial sustainability of their operations.
  
• Star Cement experienced operational challenges, including increased shutdown costs and the need to purchase more expensive outside clinker, which are contributing to short-term financial pressure and potentially impacting future earnings.
  
• Competitive landscape pressures, such as Dalmia’s expansion in the region, could adversely affect the company's pricing power and market share, impacting future revenue growth.
  
• The ongoing high logistical costs and reliance on unstable road infrastructure for transportation could inflate future operating expenses, affecting net profit margins.

Valuation

• The analysts have a consensus price target of ₹227.636 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 ₹106.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹46.9 billion, earnings will come to ₹5.7 billion, and it would be trading on a PE ratio of 25.1x, assuming you use a discount rate of 14.1%.
  
• Given the current share price of ₹216.3, the analyst price target of ₹227.64 is 5.0% 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.