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New capacities to drive growth…

Sagar Cements’ Q4FY21 performance was in line with our estimates, supported by healthy sales volumes. Revenues grew 37.6% YoY to | 417.7 crore (vs. I-direct estimate: ~| 410.6 crore) led by sales volume growth of 22.2% YoY to 1.02 MT (vs. I-direct estimate: 0.99 MT). Realisations were also up 12.6% YoY to | 4084/t while QoQ it was down 3.4%. Plants during the quarter operated at 70% vs. 58% last year, 60% in the last quarter. EBITDA margin was at 25% vs. 14.7% last year.

However, it fell 375 bps QoQ. A sharp jump was seen in power & fuel costs (up 10% QoQ to | 864/tonne) as petcoke prices, international coal prices increased 3.2%, 16.5%, respectively, QoQ. Reported EBITDA/t was at | 1019/t (vs. I-direct estimate: | 1053/t) up 91.1% YoY, albeit down 16% QoQ due to dual impact of rise in cost, lower realisations. On an absolute basis, EBITDA was at | 104.3 crore, up 133.5% YoY, flat QoQ (vs. I-direct estimate of | 104.5 crore).

For full year, the company reported impressive performance, reporting revenue growth of 16.7% YoY to | 1371 crore along with EBITDA margin expansion of over 1341 bps to 29.2% and PAT of over | 186 crore despite pandemic woes.

To achieve 10 MT capacity by FY25E

The company is aiming to reach 10 MT capacity by FY25E. In the first phase, Sagar Cement is adding 2.5 MT capacity (1 MT in MP and 1.5 MT in Odisha) for capex of | 800 crore. These capacities will get commissioned by the end of Q2FY22E. Post these expansions the total capacity will increase to 8.25 MT. Having already spent | 545 crore, we expect debt levels to peak around | 815 crore and D/E to peak at 0.6x by FY22E.

Low cost producer in AP/Telangana region

In the past three years, the company has initiated various cost efficiency measures like setting up of coal based CPP of 18 MW at its plant in Mattampally, Nalgonda taking its total power capacity to 61.5 MW. This resulted in the company being 100% self-sufficient in FY20 in terms of power compared to 50% dependence on purchased power three years back. The company also expanded grinding unit in Bayyavaram to 1.5 MT. This, in turn, has helped the company to reduce lead distance. For fuel requirement, Sagar has option to use petcoke or coal depending upon its cost benefit. Hence, we expect the company to broadly maintain the CoP at optimum levels vs. peers, which would help it to maintain better margins, going forward.

Valuation & Outlook

With capacity expansions into newer geographies like East & Central, we expect revenue CAGR of 30.2% during FY21-23E though full potential of new capacities would start reflecting from FY23E onwards. Despite a run up in the past four months, the stock is still available at FY23E EV/t of $38/t, and FY23E EV/EBITDA of 3.6x implying a considerable margin of safety. Given the strong management and healthy b/s, we maintain BUY with a revised TP of | 925/share (i.e. at 4x FY23E EV/EBITDA, $45/t on 8.25 MT) (earlier TP | 900/share)

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