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Sagar Cements Ltd>
  • CMP : 238.1 Chg : -6.65 (-2.72%)
  • Target : 250.0 (13.12%)
  • Target Period : 12-18 Month

30 Jan 2023

Cost pressure to ease out; debt remains an overhang

About The Stock

Sagar Cements is a south based cement player with cement capacity of 8.25 MT. Region wise, AP/Telangana accounted for ~60% of sales followed by Tamil Nadu (16%), Karnataka (9%).

  • Going forward, the company will be developing a presence in the faster-growing eastern and central market with recent commissioning of new 2.5 MT capacity
  • Self-reliance in power (61.5 MW), ability to switch between coal and petcoke for fuel requirement and split grinding units near market gives it cost advantage
Q3FY23 Results:

Q3 performance broadly remained in line with our estimates.

  • Revenues were up 72.6% YoY to ₹ 575.7 crore, led by sales volume growth of 66.8% YoY
  • EBITDA improved sequentially with major delta coming from declining power & fuel costs
  • At the PAT level, the company reported a net loss of ₹ 27.2 crore led by higher interest cost (pertaining to loan taken for potential M&A) and depreciation (due to commissioning of new capacities)
What should Investors do?

With capacity expansions in high growth regions like east & central, we expect strong growth momentum, going forward.

  • However, higher debt for potential M&A to pose challenge in the medium-term. Hence, we maintain HOLD rating on the stock
Target Price and Valuation

We value Sagar at ₹ 250 i.e.8.5x FY24E EV/EBITDA.

Key Triggers for future price performance
  • Incremental volumes from new units (1 MT ICU at MP, 1.5 MT grinding unit in Odisha) to help grow the business. Expect revenue CAGR of 23.7% during FY22-24E led by 20.1% CAGR in volumes
  • However, short term headwinds with respect to costs to keep margins under check. Operating leverage to kick in post stabilisation of new capacity
  • The company is on course to reach over 10 MT capacity through M&A in the medium term for which additional debt of ₹ 500 crore has been raised
Alternate Stock Idea:

In our cement sector coverage we also like another high dividend paying company Heidelberg Cement.

  • The company is a cost efficient player in central India having a strong b/s
  • BUY with a target price of ₹ 220/share

Key Financial Summary

Particulars FY19 FY20 FY21 FY22 3 year CAGR (%) FY23E FY24E 2 year CAGR (%)
Sales 1,217.6 1,175.2 1,371.3 1,596.9 9.5 2,242.5 2,442.8 23.7
EBITDA 149.4 185.5 400.4 275.8 22.7 189.1 440.8 26.4
EBITDA (%) 12.3 15.8 29.2 17.3 - 8.4 18.0 -
PAT 13.6 26.5 185.6 59.1 63.3 -79.7 77.5 14.4
EPS (|) 1.0 2.0 14.2 4.5 - -6.1 5.9 -
EV/EBITDA 22.5 18.2 8.6 14.4 - 19.3 7.6 -
EV/Tonne ($) 90.5 83.9 85.6 69.0 - 63.3 58.2 -
RoNW 1.6 2.8 15.5 4.7 - -5.3 5.0 -
RoCE 6.4 7.2 15.4 6.6 - 2.9 10.1 -
Source: Company, ICICI Direct Research

Key performance highlights

  • Revenues were up 72.6% YoY to | 575.7 crore, in line with I-direct estimate of | 575.8 crore. Growth was led by 66.8% YoY jump in volumes to 1.24 MT (up 19.8% QoQ) and 3.4% YoY increase in realisations to | 4645/tonne (up 1.3% QoQ)
  • Capacity utilisation was at 60% vs. 49% in the last quarter
  • EBITDA margin came in at 8.3%, broadly in line with our estimated EBITDA margin of 8.4%. It declined 561 bps YoY mainly due to high power & fuel cost. However, on a sequential basis, fall in fuel prices led to 706 bps jump in margins
  • Reported EBITDA/t came in at | 384/t (vs. I-direct estimate: | 391/t), down 38.4% YoY. On an absolute basis, EBITDA came in at | 47.6 crore vs. I-direct estimate of | 48.1 crore
  • Net loss came in at | 27.2 crore due to a sharp jump in interest expenses (up ~3x YoY to | 51.4 crore, up 2.2%QoQ) and higher depreciation (up ~82% YoY) due to commissioning of new capacities

Key conference call highlights

  • Demand outlook - Demand growth YoY in last nine months was 20%+ in Andhra Pradesh/Telangana, 24% in Karnataka, 20% in Tamil Nadu, 25% in Kerala, 0-3% in Maharashtra and flattish in Odisha. Expect 4.9-4.95 MT sales volume in FY23 whereas 5.5 MT in FY24 from existing plants (excluding Andhra Cements asset)
  • Prices – Q3FY23 exit realisation was flattish compared to the quarter average. Overall prices are expected to remain flattish in Q4FY23 and increase from mid-Q1FY24
  • Costs - Expect | 100-125/tonne cost saving QoQ in Q4FY23 on the back of reduction in fuel cost (better mix) + better operating leverage. Sagar is currently using domestic coal and domestic petcoke
  • Capex & Debt - Net debt likely to increase by | 150 crore but expected to peak out at | 1,250 crore with acquisition of Andhra Cements assets (includes working capital expectations also). A | 30 crore maintenance capex will be incurred in FY24, FY25
  • Andhra Cements update - LoI has been received and the same has been admitted to Amravati bench of NCLT – final order expected in due course (due date is February 9, 2023). Expect the plant to start operations from mid-Q1FY24 (cement capacity) and expect it to reach 55-60% utilisation in a couple of quarters after final order is received

Key triggers for future price performance

To achieve 10 MT capacity by FY25E: The company is aiming to reach 10 MT capacity by FY25E. In the first phase, the company has added 2.5 MT capacity (1 MT in MP and 1.5 MT in Odisha). Post these expansions, the total capacity has increased to 8.25 MT. With likely acquisition on the cards, we expect debt levels to stay elevated in the near term due to increase in the working capital requirement. However, incremental operating cash flows will take care its debt servicing ability and help bring down its debt subsequently post normalisation of its new capacities.

Low cost producer in AP/Telangana region: In the past three years, the company has initiated various cost efficiency measures like setting up of coal based CPP of 18 MW at its plant in Matapally, Nalgonda taking its total power capacity to 61.5 MW. This resulted in the company being 100% self-sufficient in FY20 in terms of power compared to 50% dependence on purchased power three years back. The company also expanded grinding unit in Bayyavaram to 1.5 MT. This, in turn, has helped the company to reduce lead distance. For fuel requirement, the company has option to use petcoke or coal depending upon its cost benefit. Hence, we expect the company to broadly maintain the CoP at optimum levels vs. peers, which would help it to maintain better margins, going forward.

Valuation & Outlook:  With capacity expansions into newer geographies like East & Central, we expect revenue CAGR of 23.7% during FY22-24E, though full potential of new capacities would start reflecting from H1FY24E onwards post potential takeover of cement assets in AP. However, the rise in the debt due to M&A would pose challenge in the medium-term. Hence, we continue to maintain our HOLD rating on the stock. We value Sagar at | 251 i.e. 8.5x FY24E EV/EBITDA.

Disclaimer

ANALYST CERTIFICATION

I/We, Rashesh Shah CA, Cheragh Sidhwa MBA, Debotro Sinha MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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RATING RATIONALE

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