Cement Sector - UltraTech Cement & Star Cement

UltraTech Cement has made a financial investment in Star Cement through acquiring non-controlling minority stake (8.69%) at a price of Rs 235 per share, totalling Rs 851 crores (excluding taxes, stamp duty and other levies)

Star Cement is a north-east region cement player, having 24% market share in the region. The company has cement capacity of 7.7 mtpa at present and in process of expanding it to 11.7 mtpa by FY27E

UltraTech has cement capacity of 181 mtpa at present (including Kesoram and India Cement). The company remains focused on expanding its capacity through organic/in-organic routes and maintaining its leadership position. With another ~33 mtpa under expansion (over FY25-27E), UltraTech’s total capacity would reach 214 mtpa by FY27E

At Rs 235/share, implied valuation of the financial investment stands at ~USD 102/ton. This is lower than the current cost of setting up an integrated greenfield cement plant (~USD 120/ton). This valuation is also lower than the valuation given by UltraTech Cement for India Cement’s acquisition (USD 121/ton)

After a muted H1FY25, operational performance for cement companies expected to improve in H2FY25, led by pick-up in demand and improvement in prices. Moreover, cost structure is expected to see some further reduction led by continuous focus on operational efficiencies
As per our discussion with industry personnel, Cement demand has improved considerably post October and is up ~10% up MoM in November & December. Overall industry volume growth remained flattish during H1FY25 but it is expected to be much better at 8-10% YoY in H2FY25, taking FY25E growth at 4-5%

On the prices front also, there is price hike announcements across regions led by Rs 30-40/bag price hike in south & east region followed by Rs 20/bag in North & Central region and Rs 5-10/bag in western region. Though these are an initial signs of improvement after almost a year, we believe that these price hikes will get implemented in the markets now considering the gradual improvement in demand 

Larger players’ premium valuations (EV/ton of $150-200/ton on FY27E) are likely to sustain considering their strong Balance Sheet, gaining market shares and scope for further operational efficiencies. Valuations of mid to small sized players would also catch up considering the increasing industry consolidation at better valuations

We have a target price of Rs 13500 on UltraTech Cement and Rs 255 on Star Cement