Chipping away

Over the past six months, the Sensex has gained 16% but quite a few stocks have stayed immune to the rally and one of them is Star Cement, whose price has stayed flat at Rs.126 levels over the same period. The stock was re-listed in June 2017 following a reverse merger with Star Ferro & Cement, which was spun off from Century Plywood in 2015.

Star Cement has been a beneficiary of the government’s focus on infrastructure development in the North East (NE) since it’s the largest player in the region with over 27% market share. Demand growth in NE has consistently remained higher than growth at the pan-India level. With a capacity of close to 5 mtpa across Meghalaya, Assam and West Bengal, nearly two-third of the company’s sales come from the region. However, in recent years, its operating margins have come under pressure – falling from a high of over 30% in FY15 to 24% currently, on the back of an increase in freight and raw material costs.

However, the management expects Star Cement to do well as demand is expected to grow at 10% CAGR in the region over the next few years as government steps up infra spending. This coupled with improving market share is expected to spur revenue at 20% CAGR over FY17-19.

Incidentally, Sajjan Bhajanka, managing director, along with other promoter group members Prem Kumar Bhajanka and Sanjay Agarwal, recently sold Rs.182 crore worth of shares (representing 3.34% stake) in a bulk deal at an average price of Rs.130 a share, which was picked up by SBI Mutual Fund. Post the transaction, SBI AMC became the latest institutional investor to pick up a stake in the company. Sundaram AMC through Sundaram Infrastructure Advantage Fund already holds a 2.1% stake. Another fund, HSBC Global Investment Funds, holds a 1% stake.

Over the past five months, the promoters and related parties have offloaded Rs.229 crore worth of shares in the open market. Even as the promoters have been paring their stake it shouldn’t be construed as their lack of confidence in the company’s prospects. Because despite the sale, the promoters still own a 70% stake.

While demand remains a factor to watch out for, the company is also entitled to receive Rs.700 crore of subsidy from the government. The company received Rs.86 crore subsidy till May 2017 and expects to receive Rs.250 crore in the current fiscal and the balance in the next fiscal. Analysts believe the receipt of subsidy could help the company turn debt free (FY17 debt stood at Rs.657 crore) and act as a key trigger for a re-rating.