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Cost efficiency improves further…

Sagar cements reported healthy set of numbers with EBITDA growing 5x vs last year during Q3FY21, though it was down marginally by 0.3% on QoQ basis. Sales volume recorded double digit growth of 12.6% YoY to 0.86MT. Realisations also remained firm at |4229/t (up 23.2% YoY) in AP and Telangana region. However, it corrected by 6.3% QoQ. The plants during the quarter operated at 58% vs 52% last year and 50% in the last quarter. EBITDA margin for the quarter came in at 28.7% vs 7.6% LY. However, it declined by 344bps QoQ. Sharp jump being witnessed in the raw material cost (up 24% QoQ to |812/tonne). However, it was down by 11.8% on YoY basis. Freight cost increased by 3.7% on per tonne basis due to rise in the diesel prices. Optimal thermal efficiency and usage of alternative fuel helped in keeping power cost lower for the quarter. Overall, company managed to reduce total production cost by 4.9% YoY to | 3015/t (down 1.5% QoQ). As a result, EBITDA/t increased by 367% YoY to |1,214/t (vs. I-direct est of |1,206/t). Higher operating profits and low interest led to company reporting net profits of | 49.6 crore for the quarter vs (I-direct est: | 45.5 crore). Gross debt stood at | 635 crore with D/E of 0.44x for the quarter. The company has declared second interim dividend of |2/share (ie. 20% of face value)

To achieve 10MT capacity by FY25E;

The company is targeting to reach to 10MT capacity by FY25E. In the first phase, the company is adding 2.5MT capacity (1MT in MP and 1.5MT in Odisha) for capex of |800 crore. These capacities will likely get commissioned by end of Q2/Q3FY22E. Post these expansions the total capacity will increase to 8.25MT. Having already spent |450 crore, we expect debt levels to peak around | 750 crore and D/E to peak at 0.5x by FY22E.

Low cost producer in the AP/Telangana region

In the past three years, company has initiated various cost efficiency measures like setting up of coal based CPP of 18MW at its plant in Matapally, Nalgonda taking its total power capacity to 61.5MW. This resulted in the company being 100% self-sufficient in FY20 in terms of power as compared with 50% dependence on purchased power three years back. The co. also expanded grinding unit in Bayyavaram to 1.5MT. This in turn has helped the company to reduce lead distance. For fuel requirement, the company 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 20.5% during FY20-22E, though full potential of new capacities would start reflecting from FY23E onwards. Despite sharp run-up in the past 4 months, the stock is still available at FY22E EV/t of $41/t, and FY22E P/E of 8.2x implying a considerable margin of safety. With strong management, cost efficiency and healthy BS, we maintain BUY rating with revised TP of |900/share (ie at 7x FY22E EV/EBITDA, $50/t on 8.25MT)

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