Sagar Cement Poised for a healthy uptick in operational performance. Buy for target price of Rs 305 (29% upside): ICICI Direct

Poised for a healthy uptick in operational performance…

About the stock: Sagar Cements is a south based cement player with cement capacity of 10 MT. Region wise, Andhra Pradesh/Telangana accounted for ~54% of sales followed by Tamil Nadu (13%), Madhya Pradesh (9%) and Karnataka (8%)

• Going forward, the company will be able to develop a presence in the fastergrowing eastern market and the more profitable central market with the recent commissioning of the new 2.5 MT capacity

• Captive power (61.5 MW) and grinding units near market give it cost advantage

Investment Rationale:

• On an expansion spree: Sagar Cements has been one of the fastest growing cement companies wherein its capacity has nearly doubled from 5.8 MT in FY19 to 10 MT currently (~15% CAGR). In FY23, company recorded robust volume growth of 34% YoY to 4.8 MT mainly driven by commissioning of new capacities in Jeerabad, MP (Central: 1.0 MT) and Jajpur, Odhisa (East: 1.5 MT). The Jeerabad facility has witnessed swift ramp-up with utilisation rates already at 80%+ levels and generating Rs 840+ EBITDA/T in Q1FY24E. Recently, it acquired Andhra Cements (1.8 MT) to further consolidate its position in southern markets. The operations have commenced from Q1FY24E (sold ~30K Ton volumes) and the management expects the new facility to add ~ 0.75 MT volumes in FY24 (42% CU). While company’s performance in Q1FY24 was tepid (mainly owing to maintenance shutdown at its mother-plant in Mattampally), we expect the volumes & profitability trajectory to improve in the ensuing quarters. We model in volume growth of 25% YoY to 6.0 MT in FY24E and 10% YoY to 6.7 MT by FY25E. Benefit of declining fuel costs expected to flow from Q2FY24 onwards (~ Rs 100/t in Q2 and further reduction expected in H2FY24). We expect company to clock in EBITDA/T of Rs 600/t in FY24E and cross the Rs 700/t mark in FY25E.

• B/S deleveraging to begin from FY25E: Significantly higher capex over last four years (including acquisition of Andhra Cements) has resulted in gross debt bloating from ~ Rs 400 crore in FY20 to Rs 1470 crore as on FY23 (D/E: 0.9x). Going forward, company is looking for mainly brownfield expansion (in Jeerabad, Gudipadu & Andhra Cements) which could entail lower capex requirements. We build in capex of Rs ~ 400 crore over FY24-25E (incurred capex of Rs 1300+ crore in last two years). We expect the company to generate steady free cash flow (FCF) and model in debt reduction of ~Rs 350 crore by FY25E (D/E: 0.6x). Though not factored in our estimates, Vizag land sale (which was a part of Andhra Cement acquisition) could further help deleverage the b/s (~107 acres which is worth~ Rs 400 crore).

Rating and Target Price

• Sagar Cement is trading at attractive valuations (US$ 50/t vs. replacement cost of US$ 110/t). We believe Sagar Cement is an attractive regional play in the southern cement markets and has demonstrated the ability to be one of the lowest cost producers. Hence, we ascribe BUY rating on the stock.

• We value Sagar at Rs 305 i.e. 10x FY25E EV/EBITDA.