One-offs mar performance; Upgrade to HOLD
* Sanghi Industries (SNGI) results got affected by plant shutdown, purchase of clinker, higher freight costs and unavailability of lignite. It delivered EBITDA of Rs410mn against our estimate of Rs478mn and EBITDA/tonne of Rs670 v/s our estimate of Rs770.
* Sales volume declined by 21.3% yoy due to plant shutdown for 15 days. The company had to undertake some unscheduled repair & maintenance. Realization remained strong at 31% yoy, as cement prices were better in Gujarat.
* Opex grew by 32.1% yoy due to: (A) Rs50mn impact of clinker purchase, (B) Rs80mn impact due to accounting changes for freight and (C) unavailability of lignite, leading to switch to imported coal. EBITDA/tn stood at Rs670 vs/ Rs541/Rs827 in Q4FY17/Q3FY18.
* Expansion plans of 4mt are on track and should get completed by Apr’20E. We prefer SNGI due to its lower variable cost of production. Post the recent correction in the stock price, we upgrade it to HOLD with a TP of Rs106, valuing it at 8x FY20E EV/EBITDA.
Higher opex impacts performance
SNGI delivered lower-than-expected results with EBITDA at Rs413mn (Emkay Est: Rs478mn), EBITDA/tn of Rs670 (Emkay Est: Rs770) and OPM of 27.5% (Emkay Est: 33.5%). Performance was affected by plant shutdown for 15 days due to unscheduled maintenance activities, leading to 20% yoy decline in volume. Realization growth at 31% yoy was led by sustained strong prices in the West region and low base. However, opex was impacted by procurement of clinker from external sources, higher freight cost and unavailability of lignite. During shutdown, it had to buy clinker, which increased cost by Rs50mn. It had to import coal at peak prices due to lower availability of lignite. Change in accounting for freight had an impact of Rs80mn. Higher opex and lower sales volume negated the benefits of better realization, leading to 2.6% yoy decline in EBITDA and 90bps yoy contraction in OPM to 16.3%. EBITDA/tn stood at Rs670 v/s Rs541/Rs827 in Q4FY17/Q3FY18. Adjusted net profit was down 29.2% yoy at Rs186mn.
Capex on track; upgrade to HOLD on reasonable valuation
We had trimmed EBITDA estimates for SNGI by 15.8%/5.4% for FY19/20E in our sector report released in Apr’18. We maintain those estimates as of now. Capex plans are on track, which would lead to capacity expansion of 4mt to 8mt (through clinker capacity expansion of 3mt and grinding unit of 2mt at the existing place and a split grinding unit of 2mt in Surat). Most of the equipment has been tied up and the expansion is expected to be completed in Apr’18. SNGI has remained one of the lowest variable cost producers of cement in India due to its ability to switch to different types of fuel at will (lignite is the biggest advantage when coal prices rise), proximity to limestone mines and captive power plants. The stock has corrected by 25% in the last few months and valuations at 6.9x/7.5x EV/EBITDA (Ex-CWIP) on FY19E/20E look reasonable. We upgrade the rating to HOLD with a TP of Rs106, valuing it at 8xFY20E EV/EBITDA.
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