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New capacities to drive strong growth from H2FY22E…

About the stock: Sagar Cements is an efficient player in South India with cement capacity of 5.75 MT. Region wise, AP/Telangana accounts for ~60% of sales followed by Tamil Nadu (16%), Karnataka (9%) and balance from Maharashtra & Odisha

* From being primarily a south-based player, the company will be able to develop a presence in the faster-growing eastern market and the more profitable central market with commissioning of new 2.5 MT capacity

* Self-reliance in power (61.5 MW), ability to switch between coal and petcoke for fuel requirement and split grinding units near market gives it cost advantage

Q2FY22 Results: Higher fuel prices caused sharp margin contraction in Q2FY22.

* Saw a margin contraction of 1568 bps YoY, 1081 bps QoQ to 16.5% during Q2FY22 mainly on account of sharp rise in the fuel prices

* Healthy non-trade demand led to a revenue growth of 13.2% YoY to | 368.9 crore. Retail demand was weak mainly due to monsoon

* PAT declined 58.6% YoY to | 20.8 crore (vs. I-direct estimate: | 35.3 crore)

What should investors do? With capacity expansions into high growth regions like East & Central, we expect strong growth momentum going forward.

* Given the healthy outlook, cost efficiency, healthy b/s and relatively inexpensive valuations, we maintain BUY rating

Target Price and Valuation: We value Sagar at | 350 i.e.8.5x FY23E EV/EBITDA

Key triggers for future price performance:

* Incremental volumes from new units (1 MT ICU at Madhya Pradesh, 1.5 MT grinding unit in Odisha) to help grow the business from H2FY22 onwards

* Expect sales revenue CAGR of 32.5% during FY21-23E led by 28% CAGR growth in the volumes. Debt levels to peak out in FY22E;

* Strong operating cash flows to help the company achieve 10 MT capacity by FY25E

Alternate Stock Idea: Apart from Sagar Cement, in our cement sector coverage we also like north based player Mangalam Cement.

* The upcoming UP election along with enhanced clinker capacity to drive growth. The benefit of various incentives to provide cost advantage

* BUY with a target price of | 600/share

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