Star Cement Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Volume surge, mix shift underway: Cement sales jumped ~29% YoY as outside-Northeast volumes roughly doubled, while Northeast grew 8% despite severe floods. The deliberate pivot toward premium products and away from nontrade is accelerating.
• PAT flat despite EBITDA jump: EBITDA rose from ₹101 crore to ₹138 crore, but PAT stayed at ~₹168 crore because the income tax exemption period ended, pushing the P&L tax rate to ~35%. Cash outflow remains low due to MAT credit.
• Costs held in check, for now: Per-ton OPEX was stable thanks to a diversified fuel mix and a legacy FSA contract, but per-kilo-cal fuel cost already rose 10% QoQ to ₹1.75. Management sees Q2 costs as stable but calls Q3/Q4 fuel costs unpredictable.
• Expansion on track, fully funded: Environmental clearance received, orders placed, and civil work started for the 3 MTPA clinker line. The ~₹2,000 Cr capex will be funded largely from ~₹1,500 Cr cash reserves, with peak net debt capped at ₹500–550 Cr.
• What to watch next quarter: Whether the 10% premium cement target is hit, if fuel costs stay benign into H2, and any sign that Northeast pricing buckles under industry-wide cost pressure.

Volume Growth & Market Dynamics

• Northeast outperformance despite headwinds: Star Cement grew volumes 8% in its home market against overall market growth of just 2%, which was suppressed by severe floods in Assam. The company generated alpha by gaining share even as the market shrank.
• Outside-Northeast doubling: Volumes in West Bengal and Bihar roughly doubled YoY to 3.32 lakh ton, driven by a low base from COVID-impacted Q1 last year and a deliberate strategy to chase only profitable markets. Management expects this growth to remain fast and sustainable.
• Full-year volume mix settling at 65/35: Northeast share fell to ~66% this quarter from ~75% historically, and management expects the full-year mix to land at 65% Northeast, 35% outside. The outside-Northeast growth is not untamed: unprofitable markets have been left.
• Nontrade deliberately slashed: Nontrade mix dropped to 14% in Q1 and is targeted at 7–8% going forward, down from 15% historically, because management cut nontrade a month back to focus on higher-margin premium products. Once the new clinker plant commissions, the company plans to re-enter nontrade aggressively, targeting government infrastructure projects at ~₹800/ton margin.
• Premium cement (ARC) push: ARC sales rose from ~3.5–4% to ~8% in June on new schemes and incentives, with a target of 10% by end of Q2. Once stabilized, management aims for ₹150–₹200 extra per ton from premium cement.

Tushar Bhajanka: "Outside Northeast I do not expect them to strengthen two Northeast now because the cost of production for them have increased. So, earlier they used to operate on variable basis or on contribution basis they have to basically dump in Northeast, but now because the cost of production has increased I do not think it is viable for them to dump..."

Pricing & Realizations

• Blended realization rose 5% QoQ: Northeast prices increased ~₹10/bag (~3%) while outside-Northeast prices declined ~₹20/bag (~5%). The blended realization still rose because prices had climbed through Q4, making the Q1 weighted average higher than Q4's.
• Northeast pricing seen as stable: Management expects Northeast prices to remain more or less stable because other players are facing higher fuel costs, limiting their ability to play with pricing. No signs of price decreases are currently visible in the Northeast.
• Outside-Northeast pricing floor: Management sees limited scope for further price falls in West Bengal and Bihar due to industry-wide cost pressure, even if Star Cement's own costs have not risen as much.
• Siliguri margin gap structural: EBITDA per ton in Siliguri (~₹700–800) is roughly half of Northeast EBITDA per ton because Northeast is the primary market with competitive advantages, while Siliguri is a secondary market with inherently higher cost to serve for all players.

Tushar Bhajanka: "I do not see much scope of prices falling too much because of the cost pressure. So, even if our cost has increased or not increased we can see other results of other companies and their cost have really increased. So, I do not think they have that kind of a scope to play around too much with the pricing."

Cost Structure & Fuel Management

• Per-ton OPEX stability: Costs did not increase significantly because of a diversified fuel mix (AFR, bamboo, Nagaland coal, other options), optimized plant performance including reduced clinker factor, and a major FSA contract locked early last year at ~₹1.4–₹1.45 per GCV that hedged against fuel cost increases.
• Fuel cost already creeping up: Per-kilo-cal fuel cost rose ~10% QoQ from ₹1.55–1.6 in the March quarter to ₹1.75 in the June quarter. Management sees Q2 costs as stable but calls Q3 and Q4 unpredictable, with a possible further 10% increase that is "very unforeseen."
• Fuel inventory depleted: Inventory fell to ~25 days from a normal 1.5–2 months because the government diverted railway racks to power plants, reducing coal rake availability for cement. The company is working with railways to restore inventory to ~1 month 10 days.
• Nagaland coal share steady: The share of Nagaland coal in the fuel mix is expected to remain broadly the same at 15–20%. The company will participate in the Meghalaya coal auction scheduled for the next day, with a volume of ~35,000–38,000 tons.
• Logistics tailwind emerging: No logistics problems in Q1 (vs Q4 issues) because volumes were lower, experience from handling large Siliguri volumes improved preparedness, and a railway siding was commissioned in Siliguri. The siding will enable rail transport of clinker and raw materials like gypsum, which should reduce costing and improve margins.

Tushar Bhajanka: "I do not see the cost increasing by much. Of course, the fuel cost may increase by about 10% which is very unforeseen. So, I cannot comment about that, but generally I do not think that the cost should increase."

Expansion Project & Capex

• Environmental clearance received for the 3 MTPA clinker expansion; some civil work already started at site. Orders placed for most machinery, contractors finalized, and raw material procurement started. Full-fledged construction to begin by August 2022 after monsoon.
• Timeline locked in: Clinker plant (3 MTPA) COD is December 2023; Guwahati grinding unit (2 MTPA) COD is December 2023–January 2024; Silchar grinding unit (2 MTPA) COD is March–April 2024. Land for Silchar has been identified, with advances to be paid and registration happening in August 2022.
• Total project cost: ₹2,000–2,100 Cr for the 3 MTPA clinker line, 0.4 Cr-ton grinding capacity, and 12 MW WHRS. FY23 capex outlay is ~₹1,000 Cr, with another ~₹1,000 Cr in FY24.
• Funding structure conservative: ~₹1,500 Cr cash reserves will be ploughed in; peak net debt is expected at ₹500–550 Cr. No long-term borrowing is planned: the company may take 1–2 year borrowing for liquidity, to be repaid once plants commission.
• Existing WHRS delayed but sorted: The WHR project at the existing plant will now commission by end of October 2022, delayed from September due to steel price increases causing vendor re-bargaining. The issue is now resolved.
• New plant utilization path: Management is confident of running the new clinker plant at 50% utilization within 1–2 years, partially fulfilled by nontrade sales to government infrastructure projects at ~₹800/ton margin. The landed cost advantage vs Chhattisgarh players in north Bengal is expected to be ~₹500/ton cheaper.

Tax & Profitability

• Tax exemption sunset hits P&L: PAT remained almost flat at ₹168 Cr despite EBITDA rising from ₹101 Cr to ₹138 Cr because the income tax exemption period ended for the Guwahati grinding units and subsidiary Star Cement Meghalaya Limited. The effective tax rate in the P&L rose to ~35%.
• Cash tax shielded by MAT credit: Despite the higher P&L tax rate, cash outflow remains low due to accumulated MAT credit of ~₹30–40 Cr, which will offset cash tax for the next three years. Full-year P&L tax rate is expected at 34–35%.
• Margin seasonality flagged: Q1 margins were higher because prices were higher and volumes were good. Q2 and Q3 are typically not as good as Q1 and Q4 due to seasonality and price drops already starting outside Northeast. Q4 margins are expected to pick up again.
• Advertisement spend declining: Q1 advertisement cost was ~₹11 Cr, down ~₹2 Cr in sales promotion and marketing expenses. A further reduction of ₹3–4 Cr is expected in Q2 because some contracts renewed in Q1 will not require payment in Q2. Full-year FY23 advertisement cost is expected not to exceed ₹33 Cr.

Guidance & Commitments

Key Metrics