Ready for the next leap
Diversification into new markets to bring in scale and margin expansion
Sanghi Industries Limited (SIL) is a Gujarat-based cement company, with capacity of 4.1mt. Around ~90% of its volumes are sold in Gujarat. An integrated cement unit, SIL owns a 63MW captive power plant and a port. SIL is one of the lowest cost cement producers due to its quality limestone, locational advantage and strong integration across the manufacturing value chain (SIL’s cost/t of INR2,766 v/s industry average of INR3,603).
* SIL’s strength lies in its access to 1b tonne of quality marine limestone reserves, which should allow it to sustainably add capacity over the next 15 years.
* We expect SIL’s margins to expand by 8.4pp over FY17-20, led by its three-pronged strategy: (i) commissioning of a waste heat recovery system (WHRS), (ii) focusing more on the coastal mode of transportation by way of acquisition of ships and (iii) achieving a favorable revenue mix with higher proportion of Portland Pozzolana Cement (PPC).
* In our view, SIL is a strong candidate for a re-rating, led by (i) expected increase in its capacity from 4.1mt now to 8.2mt over the next 30 months and (ii) anticipated scale benefits led by diversification into new higher-priced markets.
* We expect EBITDA CAGR of 33% over FY17-20, with improved pricing and positive operating leverage leading to 26% CAGR in EBITDA/t. This is likely to drive PAT CAGR of 61% to INR2.63b over FY17-20. We expect RoE to increase by 11pp to 16.8% in FY20, led by a sharp uptick in profitability.
* We initiate coverage on SIL with a Buy rating and a target price of INR157 (23% upside; valuing its present capacity of 4.1mt at USD120 EV/tonne; incremental capacity of 4.1mt likely to be added by FY20 at USD78/t at a 35% discount to replacement cost of USD120/t).
Strong integration, access to limestone reserve are differentiators
* In our view, strong integration across the cement production value chain – from access to limestone reserve to multi-fuel kiln to captive thermal power plant to captive jetty for outward coastal movement of cement and inward movement of imported input material – makes SIL one of the lowest-cost cement producers in India, also providing it with a strong competitive edge in terms of profitability.
* SIL enjoys access to 1b tonne of extremely good-quality marine limestone reserve, which can support operations at 2x present capacity for over 100 years. Additionally, the limestone mines have deposits at surface, which can be extracted by surface mining instead of the relatively expensive conventional technique of blasting. This helps SIL significantly in terms of cost of mining.
Margin improvement led by cost initiatives and favorable revenue mix
* SIL’s margins are likely to expand by 8.4pp over FY17-20, led by its costcontrol program, which encompasses installation of the 15MW WHRS and acquisition of two ships. Around 20% of its power requirement will be lowcost post the installation of the WHRS.
* This is likely to result in savings of INR150-170m post stabilization. The other initiative of acquiring two ships will likely lead to more use of the cost-efficient coastal route for transportation. Additionally, SIL is likely to increase its proportion of PPC from 35% now to ~50% over the next 18-24 months, for which it has installed fly ash silo.
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