Star Cement: North Eastern cement giant

(A) Introduction

Star Cement is the largest cement player in North East with a market share of over 23%. The company was the first to commission a cement unit in North East India. The company is promoted by Mr Sajjan Bhajanka, Mr Sanjay Agarwal, Mr Rajendra Chamaria and Mr Prem Kumar Bhajanka. The company has worked its way from being a North East India company to being an East India focussed company, by further expanding its focus to the regions of Bengal, Jharkhand & Bihar.

Star Cement Ltd (formerly, Cement Manufacturing Company Ltd) was earlier a subsidiary of Century Plyboard (India) Ltd (CPIL). It commenced operations in December 2004.

After a demerger in April 2012, Century Plyboard transferred its cement, ferroalloy, and power divisions to its wholly owned subsidiary "Star Ferro and Cement Ltd" (SFCL), which held 70.5% in Star Cement.

In March 2015, the businesses were further demerged - the ferroalloy and power businesses were transferred to Shyam Century Ferrous Ltd (SCFL) and the cement business to Star Ferro and Cement Ltd. Star Cement got its present name in June 2016.

In August 2016, the board approved a reverse merger of Star Ferro and Cement Ltd. into Star Cement, which was completed in the first quarter of fiscal 2018, post which Star Cement, the operating entity, has become the listed parent company.

(B) About the Management

The promoters of the company are individuals with great experience of the business. The promoter directors (excluding Mr Prem Kumar Bhajanka) drew a salary of Rs 1.86 crores in FY18, which formed 0.12% of the Net Sales & 0.56% of the Net Profit. Whereas, the total remuneration paid to the Board of Directors as well as the KMPs was Rs 4.07 crores, which formed 0.25% of the Net Sales & 1.3% of the Net Income in FY18.

Mr Sajjan Bhajanka- Holding the position of Chairman & Managing Director of the company and belongs to the promoter category. Sajjan is a commerce graduate and has over 40 years of experience in the field of Ferro Silicon, Plywood & Granite industry. He is the MD of Century Plyboards (I) Ltd and is the Chairman of Shyam Century Ferrous Ltd apart from holding many prestigious positions in the industry. 

Mr Sanjay Agarwal- He is the promoter of the company and works as the Managing Director. A graduate in Commerce, Sanjay also acts as the MD of Century plyboards. He is the driving force behind the successful making of ‘Star Cement’ Brand. He looks after Sales, Marketing, IT& HR activities.

Mr Rajendra Chamaria- He acts in the capacity of Vice-Chairman as well as the Managing Director of the company. He has successfully managed and grew the family timber business, and thereafter, he promoted Donypolo Udyog Limited which is engaged in the business of manufacturing of pre-stressed concrete sleepers for railways. He also promoted Barak Valley Cements Ltd. which set up a cement plant in Badarpur, Assam.

Mr Prem Kumar Bhajanka- Holds the position of Non- Executive director - Promoter of the company. He is presently Managing Director of Century Plyboards (India) Ltd. and Star Cement Meghalaya Ltd

While Mr Sajjan Bhajanka attends all the Board Meetings as well as the Annual General Meeting, other promoters- Mr Sanjay Agarwal, Mr Rajendra Chamaria & Mr PK Bhajanka have been skipping the board meetings as well as AGM of FY17 & FY18.  

(C) Shareholding Pattern

As on March 31^st 2019, the Promoters of Star Cement Ltd held 67.94% of the shares. Amongst the public 10.27% of the total shares were held by the Institutions & 21.79% of the shares were held by the Non-Institutions.

(D) Shareholders holding more than 1% (non promoters)

(E) Business Segments

The company operates 3 main segments:

1. Clinker- The company has its clinker manufacturing units and the clinker is sold by the company in the domestic markets as well as in the Export markets- in Nepal & Bhutan; besides using the Clinker for Captive Consumption in the manufacturing of Cement.
2. Cement- Star Cement manufactures the highest grade of Ordinary Portland Cement (OPC), Portland Pozzolana Cement (PPC) and Portland Slag Cement (PSC), which is sold in the North East states as well as in Bengal & Bihar markets. The company has grown from possessing one variety of Cement to Three varieties at present.
3. Power- The company has a captive power plant for meeting its internal power requirements. The power plant is sufficiently able to meet the entire requirement of the Lumshnong plant of the company.

The business of Star Cement is seasonal in nature on account of annual disruptions caused due to Monsoon in the North East states of India. The monsoon begins by the end of April and remains till September, thus, the level of operations reduces during these months.

(F) Revenue Breakup

1. On the basis of business segments

The Cement segment contributes 99% of the revenues of the company on a consolidated basis. The revenue from Cements division increased by 14.5% to Rs 2,280 Crore in FY19 from Rs 2,001 Crores in FY18 , while the Power revenues increased by 17% on a year on year basis.

2. Subsidiaries' contribution to revenue

The standalone entity that is Star Cement Ltd contributed 93% to the consolidated revenues of FY19, while the subsidiaries of the company contributed 7% towards the revenue.

(G) Sales Volume Breakup

1. On the basis of Geography

In FY19, Star Cement sold 27.06 lakh tons of Cement, out of which 20.44 lakh ton (76% of the told quantity sold) of cement was sold in the North Eastern states, while the remaining of 6.62 lakh ton (34% of the told quantity sold) was sold outside the North East states.

The company was successfully able to increase the North East sales value portion from 73% in FY18 to 76% in FY19.

The company also exports its Cement as well as Clinker into the markets of Nepal, Bhutan. In FY18, the company earned Rs 3.96 Crores from exports which formed ~0.267% of the total Revenues.

2. On the basis of Buyers' category

The company makes sales to the customers who are divided as per the usage of the material (that is for further sale or consumption) - Trade buyers & Non-Trade buyers. In FY19, 82% of the sales of the company were made to the Trade buyers and 18% to the Non- trade buyers. While in FY18, this mix was 79% trade buyers and 21% non-trade buyers.

3. On the basis of product type

The company makes maximum sales (in terms of volume) of Portland Pozzolana Cement (PPC) which accounts for 80% of the sales volume, followed by Ordinary Portland Cement(OPC) with 18% of sales volume & lastly by Portland Slag Cement (PSC) with 2% of sales volume.

(H) Manufacturing Facilities

The company as on March 2019 has manufacturing facilities located in ‘Lumshnong’ in Meghalaya & ‘Sonapur’ in Assam. Apart from this the company has grinding facilities at ‘Siliguri’ in Sikkim and ‘Durgapur’ in West Bengal. The Durgapur facility has been hired by the company to cater to the demand from Bengal & Bihar region.

Detailed information on the company’s facilities is given below:

(I) Expansion of manufacturing capacity

In FY20, Star Cement is setting up a grinding plant in Siliguri with a capex budget of Rs 400 Crores. The said plant shall commence its operations by December 2019, thus, ramping up the total grinding capacity to 6.3 million tonnes. The Siliguri plant will mainly serve the North Bengal, Sikkim, East Nepal & Eastern Bihar markets, which currently have a demand of ~5.5-6 MT.

The debottlenecking exercises of the company scheduled for FY20 at the company’s Meghalaya plant shall increase the Clinker capacity to 3 million tons. The debottlenecking exercise shall be done during the annual shutdown period of the company in July and shall be completed by the end of August.

After the rollout of the Siliguri plant, the company would move on to increase its Clinker production capacity, but till the capacity becomes operational the company shall run its Clinker capacity at over 130% of utilisation levels. For that, a plant with a clinker manufacturing capacity of 2 million tonnes shall be set up at Meghalya and will commence its operations by the end of FY21.

(J) Power Optimization

Company sources its power requirement for its ‘Lumshnong’ unit from its subsidiary ‘M/s Meghalaya Power Ltd’ under a long term agreement for the supply of quality power at competitive rates. This way the company is not only able to reduce its dependence on the Power grid, but is also able to meet an uninterrupted power supply at competitive rates. Also, the fly ash produced in the power plant is further used by the company in the manufacturing of blended cement. This way the company is able to dispose of ash in an environment friendly manner and also leads to cost optimization. 

(K) Products

Following products (Clinker and Cement) are being sold by the company under its brand name "Star Cement":

(L) Key Raw Material

The basic raw materials of the company are Limestone, Fly Ash, Iron Ore, Coal & Gypsum.

While the company is able to meet its Limestone requirements from its captive mines in Meghalaya, the sourcing of Coal has become a problem now. The company has been meeting 80% of its coal requirement through imports while 20% of the requirement is accessed from sources within 10-20 km of the company’s clinker manufacturing capacity. The local sourcing is made through an agreement with North-Eastern Coal Field & auctions from Eastern Coal field.

The import of Coal is generally made from the countries like South Africa, Australia, USA, Indonesia etc. The decision of sourcing from a particular country largely depends on the economic benefit to the company but the imported coal has low content of Sulphur in it and thus, impacts the output of the company. The company procures Iron Ore from Jharkhand, Gypsum from Bhutan and fly ash is procured from West Bengal, Bihar & Jharkhand, besides the company also sources over 10% of its fly ash requirement from its own power plants. The company has long term arrangements with major power plants like NTPC, Tata Power & others for meeting its long term requirement of fly ash.

(M) Subsidiaries

Star Cement Ltd as on March 31st 2019 has 5 subsidiaries in total. A list of these subsidiaries as well as their principal business activity is given below:

(N) Target Markets

Star Cement is the largest manufacturer in the North East region and is spread in 10 states of the East & North East India. With its facilities spread in the North East region it caters to the demand of the North Eastern states of Assam, Meghalaya, Arunachal Pradesh, Manipur, Tripura, Nagaland, Sikkim & Mizoram, thus, these locations contribute ~76% towards the revenues of the company.

Apart from the North Eastern states, the company has established significant presence in the Eastern states of West Bengal & Bihar also. Locations other than North East states contribute ~24% towards the total revenues. Thus, changing itself from a North-East India based company to East India based company.

(O) Market Share

Star Cement enjoys a market share of more than 23% in FY19 in north eastern India. The company enjoys leadership position on the back of strong dealer & distributor network as well as sufficient headroom available to it in terms of capacity.

The company enjoys a strong position in the installed capacity also. The total capacity in the North East region is 11 million tons per annum of cement, while the Active capacity of the region is 9.5 million tonnes per annum of cement. Out of this, Star Cement alone has an installed cement manufacturing capacity of 4.3 million tonnes per annum of cement, thus, constituting 45% of the active capacity.

(P) Customers

Apart from retail sales, the company’s products are also sold to some of the leading institutional buyers owing to its high quality standards. The institutional buyers of the company includes Oil India Ltd, L&T, NTPC, NHPC, HCC, Simplex Infrastructures and DGS&D.

(Q) Distribution Network

Star Cement has developed a huge distribution network that is spread across 10 states. The company has a retail network of more than 9000 touch points complementing a dealer network of over 2000 players. Around 30% of the dealers of the company are exclusive & over 28% of the total dealers have been associated with the company from past 5 years.

In FY14, while 58% of its dealers were based in North East, the company in FY19 has turnaround this proportion to 48% of total dealers in North East. This shows the company’s new focus on the North Bengal & East Bihar markets.

(R) Advertisements and Brand Building Activities

With the focus of the company in brand building, the company has successfully converted a commodity into a brand. The Star products enjoy a high recall value, which brings in repeat customers.

Company has been lately very aggressive with its advertisement campaign specifically in West Bengal & Bihar region. It employs celebrities such as Bipasha Basu, Hima Das, Debojit Saha, Sayrabhee Debbarma, Lou Majaw, Mami Varte, Pranjal Saikia, Simanta Sekhar etc to endorse its brand.

The company spent 1.6% of its Net revenues & 9.5% of Net Income in FY19 on advertisement expenditures.

(S) Competitors

The core market of Star Cement is of North East India which contributes 76% of its sales. In the North East, the company faces competition from the regional players as well as from the imports that come into the market from Outside East India and other regions like Bangladesh & Bhutan.

Specifically, Chhattisgarh has over supply of Cement and a large part of their cement is supplied in the states of Bengal, Orissa & Bihar.

The main competitors of Star Cement in North East are Dalmia Bharat Cement & TopCem while the other players are largely fragmented and running at full capacities. But in other than North East states, Star faces competition from established players like Ultra Tech Cement, Shree Cement, The Ramco Cements, JSW Cement, Ambuja Cement,  Lafarge Cement and imports from Bangladesh, Myanmar etc.

The company owing to its established & reputed brand, enjoys a pricing premium of Rs 5-10 more than Dalmia in most of the markets. While, in the markets of Bengal & Bihar, the Star Cement products are priced at par with Ambuja & Lafarge respectively.

Both Star Cement & Dalmia Cement are in the process of setting up incremental capacities to meet the growing demand from North East region.

(T) Subsidy & Other Benefits

Star Cement gets extensive fiscal benefits from the Government of India through its North East Industrial & Investment Promotion Policy (NEIIPP), 2007. The incentives include Excise Duty refund, Income Tax exemption, VAT remission, Transport/Freight subsidy apart from the Capital Investment subsidy of 30% on the investments made in new plants.

From 18^th January, 2018 onwards the company ceased to receive the transport subsidy of Rs 350 per ton which impacted the margins negatively. The company expects to receive the outstanding transport subsidy of Rs 68 crores in Q2 of FY21.

The company earns an average GST Refund in the range of Rs 200-250 per ton on the output of both its plants. One of the plant’s GST benefit will end in FY23 whereas the other plants GST benefit shall end in FY27. Owing to the Income Tax benefits, Star Cement is expected to pay a tax of 8-8.5% in FY20.

(U) Competitive Advantage

The company has access to its own Limestone mines in Meghalaya. These mines are located within 2-3 km range of the company’s plant and measures over 1000 hectares with reserves of ~700-800 million tonnes. This allows the company to establish a strong linkage with uninterrupted supply of raw material. As well as the company’s captive mines are rich in high quality limestone with content of Calcium Oxide greater than 49% and the reserves are sufficient for more than 80 years. These captive mines not only provide high quality inputs but also ensures a continuous supply.

Further, the grinding units of the company at Guwahati and Bengal, enjoy the locational advantage of being close to the target markets.

The company has developed a railway siding at its Meghalaya plant, which have become operational in February 2019 for the loading and unloading of material. This siding is further going to bring cost savings to the company in FY20.    

The Fly ash generated by the power plant of the company is utilised in the manufacturing of Slag cement, which forms around 2% of the sales volume of the company.

The company has collaborated with IWAI on using Inland Water Transport for the transportation of cement from Guwahati plant to various destinations. But the said facility cannot be used during monsoons as the water level rises during monsoons.

(V) Allegations/Controversies

In January 2012, Star Cement’s name came in the Mining Scam. As per the article Star Cement along with seven other companies was found flouting the environmental & other laid norms. The said companies were not only flouting norms but also undertaking mining activities beyond their said boundaries. The companies were found disposing wastes (such as Fly ash) directly into the rivers.

(W) Future Course of Action & Guidance

Star Cement projects a growth in the sales volume by 15% in FY20. Considering the raw material position, transport subsidy position as well as the scope for further price change, the management of the company gives a guidance of maintaining the EBITDA margins at the FY19 level of ~24.53% (New normal being around 25-26%) and EBITDA per ton around Rs 1600 per ton.

Given the presence of cash reserves with company, the company might look towards inorganic growth opportunities in its key markets of Bengal, Bihar & North East. The company if is able to get the right fit might go for entire Integrated units rather than buying only grinding units.

In the current year, the company shall maintain its Clinker sales at the current levels, but from FY20 Star Cement will stop selling clinker to the external customer.

(X) Opportunities and risks

Opportunities

1. Geographical Advantages

Star Cement’s geographical presence is of utmost value to the company. This is because of the following reasons:

• No Significant competition- Due to the topography of the North Eastern states, transporting cement from Eastern states to North Eastern states is not very cost effective. Hence, the inflow of cement from eastern states of India has considerably reduced, which has benefited Star immensely which is able to play without much presence of competition.
• States rich in minerals- The eight states of North East are very rich in natural resources and the limestone mines in these states possess one of the best kinds of limestone reserves which are sufficient to meet the demand for next many years.

2. Infrastructure Developments

The Government of India’s focus on the development of Infrastructure in the North East states in the form of construction of new roads, bridges & power projects. These projects shall not only develop newer routes for the company’s product to reach the existing markets as well as new markets. Further it will also create demand for the building materials. Amongst the building material cement is one of the most crucial element & in North East, Star is the market leader with a market share of ~23%.

3. Strong sales negtwork

In FY19, Star consolidated its dealer network with over 2000 dealers and 9000 retailers. Owing to a strong dealer network, the company manages to achieve 82% of sales through its dealer channels. The trade sales occur through the dealers and earn better realisations than the non-trade sales which are largely institutional in nature.

4. Entry barriers

The cement industry has high entry barriers which are in the form of attaining environmental clearances, securing limestone mine lease, setting up of plant, marking a presence in the market. All these tasks take huge time and money, plus at the end there is no guarantee of success given huge cost burden and the advantages of economies of scale to the existing companies.

Risks and concerns

1. Transportation cost

Star Cement’s plant at Silliguri is coming up with a grinding capacity of 2 MnTPA, but the company shall be transporting clinker for this unit from its Meghalaya plant. This will not only put additional pressure on the Meghalaya plant (until company comes up with 2MnTPA of Clinker capacity at Meghalaya plant), but will also add transportation cost of Rs 1400-1500 per ton.   

2. Monsoon related annual shut down

Meghalya being the wettest place on earth receives the maximum rainfall and a normal monsoon season in Meghalaya starts from the mid of April and remains till September. This leads to an almost closure of the company’s operations at its plant in Meghalaya, due to which the company has to maintain inventory before the monsoons as well as has to invest in silos which can protect the company’s cement from moisture.

3. Fuel cost

The company uses coal as its feedstock. Owing to the environmental hazards of pet coke, company’s kilns do not use pet coke at all. The cost of coal is more than pet coke, moreover the company has been using 80% imported coal these days (due to the on-going coal disruption in North East) which further adds to the fuel cost. As per the management’s guidance, the cost of imported coal is expected to increase further by Rs 100 per ton in FY20. Also in the long run a cost increase of Rs 200 per ton is expected on coal.

4. End of subsidy

While the benefit of transportation subsidy of the company ended in January 2018, the GST benefit on one of the plant shall come to an end in FY23 and the other plant GST benefit shall come to an end in FY27. Also the Income Tax benefit for the company shall end in FY23 after which the company shall be exposed to full tax rate.

5. Volatility in input price

The inputs of cement industry are highly susceptible to price fluctuations which impact EBITDA per ton. A rise in the prices of raw material, power, fuel can significantly impact the bottom line of the company.

6. Cyclical Cement Industry

Cement industry is highly cyclic; a period of boom is followed by period of depression. When the demand for cement falls the companies need to cut down on their production and with a reduction in the utilisation level the company loses the economies of scale which adds to the unit cost of production.

7. Environmental violations

There were certain reports and news articles relating to the violations made by the company relating to getting the mining lease as well as on extraction of limestones from beyond their prescribed area. The local people had opposed the workings of the company, although nothing happened at that time but a more fierce opposition related to the company’s operation from the localities might affect the company in future.

8. Freight cost risk

Cement is a low-value & high- volume commodity, where in freight & forwarding forms an important element. This is because of the need to transport the raw material, clinker and the final product from one place to another. Any sort of strike by transporters or increase in the prices of Diesel shall impact the company.

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References:  Annual Reports, News Publications, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews.

Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. The report & references mentioned are only for the information of the readers about the industry stated.