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Sustained pricing pressure!
Sagar Cements Ltd (SGC) is a South India based company with a cement manufacturing capacity of 5.75 MTPA and captive power capacity of 43.35 MW. The company has a 3 MTPA plant in Mattampally, Telangana; 1.25 MTPA plant in Gudipadu, Andhra Pradesh (AP) and 1.5 MTPA grinding unit in Visakhapatnam, AP (increased from 0.3 MTPA to 1.5 MTPA in Q1FY19). We believe that the company is strategically placed with ~60% volume exposure to high-growth regions of AP/Telangana and East. Going ahead, we estimate cement demand in AP/Telangana and the Eastern region to grow at ~12%/9.5% respectively over FY18-FY21E which would make the company one of the key beneficiaries of the growth story.
* Robust volume growth continues :
Volumes for Q2FY19 came in at 0.72 MT as against 0.6 MT in Q2FY18; growth of ~20.1% Y-o-Y. Similarly, volume growth for H1FY19 was robust, at ~18% Y-o-Y, on the back of higher infrastructure activities in AP & Telangana combined with demand pickup in Tamil Nadu. However, pricing continued to remain benign in South with net realizations for the company down by ~9% Y-o-Y.
We expect volumes to grow from 2.71 MT to 4.40 MT over FY18-FY21E (~17.4% growth) on the back of ramp up in Vizag unit coupled with healthy demand scenario in AP/Telangana and East. We estimate realizations to improve marginally, increasing from INR 3825 to INR 4003 over FY18-FY21E.
* Maintenance shutdown and input cost hike hurt margins :
EBITDA/tonne for the quarter stood at INR 294; down 54% Y-o-Y owing to weak realizations, sharp surge in input costs and shutdown (upgradation and maintenance) of Gudipadu unit for 50 days. However, total costs/tonne was flattish at INR 3305 compared to INR 3300 in Q2FY18 as the hike in input costs was offset by efficiency improvement measures. We reckon that this trend would continue with further hike in input costs to be offset by a.) Increase in conversion ratio (cement-clinker ratio) due to higher sales of PSC cement in the Eastern region, b.) Optimization of lead distance post ramp up of Vizag unit, and c.) Commissioning of 18 MW CPP by Q4FY19.
Consequently, we estimate EBITDA/tonne for SGC to stand at INR 559 by FY21E as against INR 557 in FY18.
* Outlook and Valuation :
The Company recently announced capacity expansion plan in MP (capacity of 1 MTPA) and Odisha (capacity of 1.5 MTPA) with project cost of INR 4,250 mn and INR 3,080 mn respectively. We believe the move is positive as it will result to geographical diversification in regions with strong growth potential. However, we will update our projections post further clarity on the expansion plan. We value SGC at EV/EBITDA of 8x and EV/tonne of $70 on FY21E, arriving at a target price of INR 1,060/share resulting into an upside of 57.1% from CMP of INR 675/share. We have a BUY rating on the stock.
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