Background: Sanghi Industries Limited was the flagship company of The Ravi Sanghi Group dealing in the production and distribution of Cement under the Brand Name “Sanghi Cement”. Sanghi Cement was commissioned in 2002 with one of the world’s largest single stream Cement Plant located at Sanghipuram, in the Abdasa Taluka of Kutch District of Gujarat State. This plant is fully automatic with state-of-the-art technology from Fuller International, USA.
It is ranked as the second-largest cement plant in one location in India. It is one of the top three players in Gujarat and is also increasing its presence in Maharashtra, Rajasthan and Kerala. The co. has one manufacturing facility located in Sanghipuram, Gujarat. It also has a 130MW captive thermal power plant, captive mines, a water desalination facility, and a captive port in Kutch that can handle 1 mmtpa of cargo. Currently, SANGHI operates with a 6.1 million tonne grinding capacity and 6.6 million tonne clinker capacity, boasting a substantial limestone reserve of 1 billion tonnes and proximity to lignite resources.
The company grew its capacity aggressively and largely funded it through debt. The debt almost doubled from ₹ 770cr on 31 March 2021 to almost doubled to ₹1,550cr on 31 March 2023. Fuel cost was historically higher than peers for Sanghi and it used a mix of Coal and Lignite. Sanghi faced environmental clearance issues in the procurement of lignite which resulted in a change of power and fuel mix to be more dependent on Coal. With coal prices spiking up in 2021-2023, the margins to a further hit. COVID severely impacted the company’s operations, impacting dispatches due to a weak demand scenario, and the new 4mtpa clinker capacity was delayed and the 2mtpa grinding unit was deferred by almost two years.
The company was stuck in a deathly loop of poor cash flow generation, mounting debt, low dispatches, increasing costs, lowering margins and poor capacity utilization at almost 25%. The weakening debt metrics resulted in the company refinancing its existing NCDs from 10.5% to as high as 15-16%, with the overall finance cost ballooning to as high as almost 20% in FY23.
Strategic Acquisition by Ambuja Cements: In August 2023, Ambuja Cements Ltd. announced the acquisition of a majority stake in Sanghi Industries at an enterprise value of ₹5,185 crore to buy a 56.74% stake in Sanghi Industries from Ravi Sanghi & family and the transaction was completed in December 2023. The acquisition was done at ₹121.9 and Ambuja made the mandatory open offer at ₹114.22 and later increased to ₹121.9 an incremental 7.93% stake was added by Ambuja from the public through an open offer. Currently, Ambuja owns a 62.4% stake and Ravi Sanghi & family owns about 15%. Ambuja recently decided to sell almost 2% in the open market to comply with the minimum public shareholding norms, indicating that Ravi Sanghi & family’s stake is unchanged.
Steps taken by the Adani Group:
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Supply Agreement- Sanghi has entered into a Master Service Agreement with ACC and Ambuja for the Sale of Cement, Clinker and allied products. ACC and Ambuja will bulk purchase Clinker and Cement produced by the company, which will then be sold under the AMBUJA/ACC brand. With this arrangement, the company is expected to improve its capacity utilization to around 80%. The company will receive advance payment along with the purchase order, the same will be used for the working capital and smooth operations and Sanghi will not have any financial constraints in the future. The pricing of the above arrangement will be "Manufacturing Plant’s Cost of Production (excluding Interest and depreciation) of previous Quarter, plus 10% markup. Adani Group believes this will improve the company’s EBITDA margins to 9%. While the duration of this agreement is not clear, shareholders’ approval has taken till FY25 for Rs. 2,000cr.
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Financial Assistance- Sanghi’s debt as of 30 Sept 2024 stood at ₹ 1,828cr. Ambuja has already provided an unsecured loan by way of ICDs of ₹ 2,100 cr, at 8% interest rate, which has been utilized for repayment of high interest-bearing secured debts and to meet the other working capital and business needs. Additionally, it is proposed for Ambuja to extend another unsecured loan by way of ICDs of up to Rs. 500 Crore at an 8% interest rate, which will be utilized by Sanghi for working capital requirements, plant balancing and refurbishment, IT up-gradation, initiatives towards ESG, improve evacuation infrastructure and other general corporate purposes. Therefore, Sanghi will have no financial constraints in the future.
Expansion Plans and Vision: Under the Adani Group, the company has ambitious expansion plans. The promoters are set to debottleneck the grinding capacity, adding 3.9 million tonnes with a waste heat recovery system, projecting a minimal capex of ₹ 500 crores by March FY24. Post this enhancement, the total capacity will reach 10 million tonnes annually.
Additionally, the company plans to invest ₹ 3,000 cr to augment grinding and clinker capacity by 5 mt, scheduled to be operational by FY26. The promoters aim to deepen and expand the captive port capacity to accommodate larger vessel sizes, fostering synergies with another promoter-led company, Adani Ports, to implement an efficient coastal transport strategy.
Analysis: This is a special situation case, with a potential turnaround in operations being the trigger for the re-rating of the stock. With the financial support being offered by Ambuja, the liquidity challenges of Sanghi have been completely eradicated. The supply agreement with Ambuja will result in a swift improvement in capacity utilization to almost 80% from the current 25%. However, in the short term the operating margins will be capped as the projected EBITDA from the arrangement should be around 9%, which is low, given the average EBITDA margins for the company were historically in the range of 15-16%.
In the short term (6-12 months) assuming no improvement because of capex, the company should be able to reach around 80% capacity utilization, which will bring it back to profits and will start generating free cash flows. Over three years, once the production capacity is increased to 15mtpa and assuming 80pc capacity utilization, the company will be similar to the size of JK Lakshmi with an enterprise value of around Rs. 10,000cr. The company can clock revenues of ~Rs. 7,000cr and EBITDA of Rs. 1,000cr, estimated EV/EBITDA ratio of 10x, the EV should be ~ Rs.10,000cr.
Key risks to the investment:
- Merger with Ambuja could limit the upside potential, still the investment should fetch a minimum of the open offer price of Rs. 121.9.
- Softening of cement prices in the west zone, particularly in Gujarat can impact realizations.
- Delay in planned capacity expansion.
- Slower than expected improvement in capacity utilization.
- Sanghi Industries is now part of the Adani Group, it will be exposed to high volatility like other shares of the group to any political events in the short term.
Conclusion: This is a special situation case, with a potential turnaround in operations being the rationale for investing. The acquisition has fixed the liquidity issue for the company, smoothening the track for expansion and improving its profitability and capacity utilization.
Disclosure: Invested
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