Sagar Cement Ltd Research Report By Ventura

We are pretty enthused by Sagar Cement Ltd’s (SCL) astute understanding of the cement cycle, meticulous and careful selection of acquisition targets and its relentless focus on cost efficiencies. SCL is our favorite way to play the cement growth story in south India. We upgrade our price target on the stock to Rs 1,715 (11x FY20 EV/EBITDA) as we introduce estimates for FY20. Our revised price target implies a potential upside of 88.9% from the CMP of Rs 908 over the next 24 months.

Our optimism is bolstered by the following:

 Strong revenue growth on the cards

Sales volumes to grow at a healthy CAGR of 18.7% to 3.68 MT by FY20. Pricing trends have remained resilient despite capacity overhang. We build in 8.9% CAGR growth in average realizations. On the back drop of the above net revenues are expected to grow to Rs 1,775 crores.

 SCL, has a diversified geographical sales mix. In Q2 FY18, the company sold 54% of its volumes in AP and Telangana, TN (15%), Maharashtra (11%), Karnataka (14%), Orissa (4%) and other states (1%). Going forward it plans to increase its sales in the markets of Orissa due to additional capacity of SCL coming up in Vizag.

 Strategic capacity expansions and cost savings to help lower freight costs and boost EBITDA/tonne SCL has got three manufacturing facilities, one each at Vizag, Mattampaly and Ananthapur and its capacity is set to scale to 6 MT p.a by FY20

Well thought out capacity expansions both brownfield and greenfield and a strategic partnership to enable maximum return on capital employed.

a) SCL had acquired a grinding unit of 1,81,500 MT capacity at Bayyavaram in Visakhapatnam District of A.P. for Rs 60 crores and had expanded its capacity to 0.3 million tonnes by shifting idle equipment to the Sagar, Mattampally unit. The Bayyavaram expansion is expected to cater to the high growth markets of Kakinada and Vishakhapatnam in Andhra Pradesh and Bhubaneswar in Orissa. The expansion from 0.3 mtpa to 1.5 mtpa is likely to be completed by June 2018 at a cost of Rs 168 crores.

b) De-bottlenecking at the BMM plant at Ananthapur should help enhance capacity to 1.5 mtpa by FY20 from the present 1 mtpa. Here, SCL has adequate limestone reserves and hence will not be a constraint to service expanded capacity.

c) SCL, has also entered into a MOU with Heidelberg Cement (Zuari Cement), whereby SCL shall purchase cement from Heidelberg cement’s plant near Solapur and shall be selling the same under Sagar Cement brand name in the Solapur market which is closer to Heidelberg’s plant compared to Mattampally plant of SCL. SCL shall procure this cement at Rs 2850/ton plus taxes (with an escalation clause of significant changes in the price of coal and pet coke). Freight shall be born by SCL over and above the purchase price. By the above arrangement SCL shall save Rs 300-400/ton while catering to the Solapur Market which was a significant market to SCL.

All the above measures will help to significantly cut down on the average lead distance from its manufacturing capacity to its markets. Now the BMM acquisition will service Tamil Nadu, Karnataka & Kerala markets. The Bayyavaram unit will enable deeper reach in North Eastern coastal AP Districts & Southern districts of Odisha markets