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Realization under pressure; volume improvement holds the key
* Sanghi Industries (SNGI) reported EBITDA of Rs324mn vs. our estimate of Rs274mn, led by higher-than-estimated sales volumes of 0.62mt (Emkay est: 0.51mt). OPM was 13.3% vs. our estimate of 13.4% and EBITDA/ton was at Rs535 vs. our estimate of Rs523.
* Sales volumes were up 29.5% yoy to 0.62mt, benefiting from the low base of the last year (volumes were down 15.4% yoy in Q2FY18). Realization declined 8.3% yoy/1.5% qoq as cement prices were under pressure in its key markets.
* Opex/ton was up 2.9% yoy due to higher energy costs (up 30.7% yoy) and raw material costs (up 32.5%yoy). Employee costs and other expenses were down 39.2% and 34% yoy, respectively. Lower realization and higher opex led to a 46.4% yoy fall in EBITDA/ton to Rs523 and a 942bps contraction in OPM to 13.3%.
* We reduce FY19/FY20E EBITDA by 12.2%/9%, factoring in lower cement prices. The 4mt expansion is on track and is expected to be completed by Apr-20. We maintain Hold on the stock with a revised TP of Rs74.
Lower realization; higher costs impact profitability
SNGI reported better-than-expected results, with EBITDA at Rs324mn (Emkay est: Rs274mn); EBITDA/ton at Rs523 and OPM was 13.3%, in line with estimates of Rs535 and 13.4%, respectively. Sales volumes were up 29.5% yoy which got the benefits of a low base from last year (In Q2FY18, sales volumes were down 15.4% yoy due to GST implementationrelated issues). Capacity utilization continues to remain low at 62%. Realization was down 8.3% yoy and 1.5% qoq as cement prices were under pressure in it’s the key markets. Opex/ton was up 2.9% yoy, with higher energy costs (+30.7% yoy) and raw material costs (+32.5% yoy) being offset by lower employee costs (down 39.2% yoy) and other expenses (down 34%yoy). Energy costs were up 14.9% yoy due to increase in Lignite price (Lignite cost/kcal has increased to Rs1.1; coal cost/kcal is Rs1.15). The decline in realization and higher costs led to a 30.6% yoy drop in EBITDA to Rs324mn and a 942bps yoy contraction in OPM to 13.3%. EBITDA/ton was Rs523 vs. Rs975/Rs631 in Q2FY18/Q1FY19. Interest expenses declined by 11.3% yoy due to debt restructuring. Profit was down 82.1% yoy.
Reduce estimates, lower utilization remains a concern
We reduce SNGI’s FY19/20 EBITDA estimates by 12.2%/9%, factoring in lower-thanestimated cement prices. The capex plans are on track, which should lead to a capacity expansion of 4mt. This expansion is expected to be completed in Apr-20. In our view, the company should demonstrate its ability to improve sales volumes as the lower utilization of cement (58%/65% in FY18/H1FY19) remains a concern considering its aggressive expansion plans. The stock trades at 9.8x/7.6x FY19/FY20 EV/EBITDA (ex-CWIP). We maintain our HOLD rating with a revised TP of Rs74, valuing it at 9x mid-FY21 EV/EBITDA against 10x earlier considering deteriorating return ratios.
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