Star Cement Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Volume surge, geography in focus: Q2 volumes jumped ~44% YoY, far ahead of plan, powered by ~91% growth outside the North East. Management is sticking to its ~17% full-year growth target and expects to beat it.
• Fuel costs bite, relief is structural: A nationwide coal shortage forced the company into expensive spot purchases, pushing fuel cost up from ~₹1.5 to ~₹2.1 per GCV. This pain is also a barrier to entry, reducing dumping from mainland players into Star's core North East market.
• A capex cycle begins, with a delay: Construction has started on a new clinker line and grinding units, but FY23 capex guidance was revised down to ~₹700 crores from ~₹1,000 crores, with major spending now pushed to Q4.
• Premium push is stalling: The share of premium products was flat at ~7%, missing the earlier 10% target. The new goal is 11% by year-end, but management admits it must follow competitors' pricing, limiting its ability to widen the premium gap.
• What to watch next quarter: Whether the promised lead distance reduction materializes, the pace of the delayed WHRS plant commissioning, and any progress on the premium product mix target.

Volume & Demand Environment

• Broad-based volume growth: Total volumes grew ~44% YoY, with the North East growing ~33% and markets outside the North East surging ~91%. The North East still accounts for over 65% of total sales.
• Bihar rebound: Sales in Bihar grew ~120% YoY, as the sand availability issues and floods that hurt the prior year did not repeat.
• Trade mix shift: The deliberate move toward higher-margin trade sales continued, with the trade proportion rising to ~92.4% from ~85% QoQ and 88% YoY.
• Demand tailwinds: Management sees the North East market growing at ~10-11% and outside areas at ~12%, with a good season ahead and some ability to pass on cost increases.

Management: "The volume growth that we have had in quarter two has been about 44%. So, we have been fairing much better than what we had actually projected earlier."

Competitive Dynamics & Market Structure

• High costs as a moat: Rising variable costs, especially fuel, have made it unprofitable for mainland players like Ultratech to dump cement in the North East. This trend is expected to continue in Q3, protecting Star's core market.
• First-mover advantage: Star's ongoing capacity expansion is expected to give it a 2-3 year window to capture higher market share before other players set up new capacities, as smaller North East players are not expanding.
• No consolidation yet: Management sees no immediate scope for consolidation, as smaller, inefficient plants (~0.06-0.07 crore tonnes) are too small for larger players to bother with, given the difficult terrain. Consolidation may only become possible after Star's own new capacity puts pressure on these units.
• Geographic expansion ambitions: The company is cash-rich and actively exploring new geographies like Madhya Pradesh and Rajasthan to deploy future cash flows once its North East capacity is built out. Management sees limited synergy requirements for such a move, treating any new market as a Greenfield effort.

Management: "I think now because the variable cost has really increased, they are not finding it that profitable to actually dump in North East. So, from that perspective, I think the high costs are leading to less dumping in North East from outside companies."

Costs & Margins

• Fuel cost surge: Fuel cost per GCV increased from ~₹1.5 to ~₹2.1 because Coal India subsidiaries (EPL) only partially fulfilled FSA contracts due to a nationwide coal shortage. This forced the company to source ~45% of its coal from high-cost spot auctions.
• Power cost increase: Power costs rose by ~₹0.5 per unit, though the increase was capped at ~10% in Q2 as IEX rates were not fluctuating much.
• H2 cost outlook: Management expects a ~30% increase in fuel and power costs in the second half, with the elevated fuel costs seen in Q2 passing through to Q3 and Q4.
• Regional margin split: North East operations generate an EBITDA of ~₹1,400 per tonne, while outside markets yield only ~₹400-500 per tonne, due to both higher logistics costs and lower pricing. The overall target is to maintain an average of ₹1,200-1,250 per tonne.
• PAT decline: H1 PAT fell to ₹99 crores from ₹115 crores YoY, driven by higher income tax expenses as the tax exemption period ended for the Guwahati grinding unit and subsidiary Star Cement Meghalaya Limited. Cash tax will be at MAT rates only.

Management: "The main reason for this is of course that FSA contract that we have are only partially being obliged by the EPL mainly because of the shortage which is happening throughout the country. So, because of that we had to buy fuel from spot contracts which is leading to a higher surge in the fuel cost."

Pricing & Product Mix

• Premium product stagnation: The share of premium products remained flat at ~7% of overall sales, missing the earlier target of 10% for this quarter. The new target is ~11% by FY23-end, with a focus on the Bihar market outside the North East.
• Pricing strategy constrained: Management is working to widen the price gap between premium cement and PPC but admits it must follow market trends and competitors' pricing, limiting its ability to act independently.
• Regional price movements: North East pricing was broadly stable, down only ~₹10. Outside the North East, prices fell ~₹20 in August in North Bengal, recovered in September, fell again in October due to festivals, and a ₹10 increase was taken in November with a further ₹10-₹15 increase expected.

Management: "We are working towards creating the difference between the PPC and the premium, but we have to follow the market trend, so we have to follow other players and the difference that they have between premium and the normal PPC."

Operations & Efficiency

• Lead distance focus: Average lead distance increased marginally from 230 km to 233 km QoQ. Management's stated focus from next quarter is to reduce this by serving closer, higher-profitability markets rather than chasing utilization in distant areas, though no specific reduction target was committed to due to route variability in the North East.
• Siliguri utilization: The Siliguri grinding unit operated at ~50% utilization in Q2, a seasonally weak quarter, up from ~30% YoY. Full-year average utilization is expected to be ~66% or above, with Q3 better and Q4 the best.
• WHRS delay: The commissioning of the 12 MW waste heat recovery system has been delayed by one month, with a revised timeline of end of December 2022.
• Meghalaya coal optionality: If local individuals succeed in obtaining mining leases, Meghalaya coal could become available, which management says would be "a very big saving for the company going ahead."

Management: "I think from next quarter as well, you will see that the lead distance would be coming down and that will be primarily our focus. ... the focus is definitely to serve closer, to serve to a higher profitable market and do not go very far for the sake of just utilization."

Guidance & Commitments

Key Metrics