Buy Sagar Cement Ltd For Target Rs.321 - Yes Securities
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Entering the new phase of growth
Our view
The new upcoming capacities (MP/Orissa) will take total capacity to 8.25MTPA by Dec’21. This would drive the incremental volume growth in the coming years by +18/43% YoY in FY22/23E. SGC aspires to double the capacity (including ongoing expansion) to 10MTPA by FY25E. With the geographical diversification, SGC expect to mitigate the risk of high exposure to the single south region. We expect the favorable pricing condition would continue going further. Also, it would offset the impact of the inflated cost and led the EBITDA/te rebound to +Rs1000/te in FY22/23E.
Result Highlights
* Heavy monsoon in the south have impacted the volume sequentially by 3% q/q to 0.85MT (v/s YSEC 0.91MT), however over the weak base it remained up by 18% y/y in Q2FY22. The NSR stood at Rs4324/te (in line with YSEC estimate of Rs4374/te) down by 3% q/q and 4% y/y led the reported revenue stood at Rs0.369bn (v/s YSEC Rs0.396bn) down by 6% q/q, while grew by 13% y/y in Q2FY22.
* On a sequential basis, the softened NSR and muted volume along with Inflating input cost & power costs (up by 13/12% q/q respectively) had dented the EBITDA by 43% q/q in Q2FY22.
* While, on y/y basis the EBITDA de‐grew by 42% y/y led by inflated cost (RM/power/freight/other cost up by 27/83/22/33% y/y) in Q2FY22. The other cost increased due to the one‐time annual maintenance of Rs50mn in Q2FY22.
* The inflating power cost by 55% y/y to Rs1,313/te dented the EBITDA/te by 51% y/y to Rs712/te in Q2FY22 (v/s Rs1,217/te in Q1FY21).
* This had harshly impacted the PAT to decline by 59% q/q and 57% y/y to Rs200mn in Q2FY22 v/s YSEC est. of Rs478mn in Q2FY22.
Valuation
We believe SGC would generate a positive operating cash flow of Rs6bn over FY22/23E and would aid in deleveraging its B/S from FY22 onwards. At CMP, the stock is trading at 10/7x in FY22/23E on EV/EBITDA. Thus, we retain our BUY recommendation with upgrading our TP to Rs321 (previous Rs300), valuing the stock at 8.5x (previous 8x) EV/EBITDA on the FY23E estimate.
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