ICICI Securities Downgrades Star Cement Amid M&A Concerns
ICICI Securities has downgraded its rating on Star Cement to “Hold” from “Buy,” citing concerns over a potential M&A (mergers and acquisitions) overhang following UltraTech Cement’s recent decision to acquire a significant stake in the Northeast-based cement company. UltraTech, India’s largest cement manufacturer, has agreed to acquire an 8.69% stake in Star Cement for an amount not exceeding Rs 851 crore. The transaction, which was approved by UltraTech’s board on Friday, involves the purchase of up to 3.7 crore equity shares of Star Cement at a price of Rs 235 per share in an all-cash deal.
The brokerage firm pointed out that the acquisition, which values Star Cement at an enterprise value per tonne (EV/t) of around USD 150, based on its current annual capacity of 7.7 million tonnes, raises questions regarding the future strategic direction of Star Cement. While the valuation aligns closely with ICICI Securities’ target price of Rs 227 per share, the deal introduces uncertainty, particularly due to the heightened speculation about broader mergers and acquisitions (M&A) in the sector. The Northeast cement market, where Star Cement holds a dominant position with its integrated plant in Meghalaya and four grinding units, could be reshaped by this deal. Star Cement has ambitious plans to scale up its production capacity to 25 million tonnes per annum (mtpa) by 2030.
However, given that promoter entities control 66.47% of Star Cement through more than 50 group companies, the deal could fuel speculation about further M&A activity or potential ownership changes in the future. ICICI Securities noted that while the stake purchase by UltraTech strengthens its market position in the region, it also brings elevated risks of ownership shifts within Star Cement. This, combined with the stock’s rally and current high valuations, poses a cautionary note for investors in the near term. On the day following the announcement, shares of Star Cement dropped by 1.5% to Rs 228.50 on the Bombay Stock Exchange (BSE), reflecting market apprehension surrounding the acquisition. In contrast, UltraTech’s stock gained 0.6%.
Star Cement, which was incorporated in 2001, reported a turnover of Rs 2,910.66 crore in fiscal year 2024, marking a notable increase from Rs 2,704.84 crore in FY23 and Rs 2,221.81 crore in FY22. However, ICICI Securities has expressed caution, suggesting that the current valuation and potential for further ownership changes could limit the upside potential for the stock in the short term.
