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Cost pressure impacts margins; Capacity expansion to drive superior volume growth

Sagar Cement’s Q2FY23 EBITDA sharply declined by 91% YoY and QoQ to Rs57mn vs. our estimate of Rs156mn (Consensus: Rs234mn) owing to higher-than-expected increase in cost/ton. Accordingly, EBITDA/ton declined to just Rs55 (Emkay est.: Rs150). Volume growth remains superior at 21% YoY to 1.03mt, in line with our estimates. The company has recently increased its capacity by 43% to 8.3mt. Sagar is expected to register an industry-leading volume CAGR of 19% over FY22-25E, aided by a low base effect and capacity expansion. The company is also expanding its footprint to the East and Central regions, which would lead to reduced earnings volatility. In May-22, the company issued 13.2mn equity shares (10% stake) to Premji Invest at Rs265/share, totaling Rs3.5bn, to fund growth capex. Factoring in Q2FY23 miss and higher opex/ton, we reduce our FY23 EBITDA estimates by 29% and 4-6% for FY24E and FY25E, respectively. We maintain our Buy rating on the stock with a revised Sep-23 TP to Rs220 (earlier Rs225) post the quarterly rollover. Our DCF-based TP implies a one-year forward EV/EBITDA of 8x.

Results Summary: Sagar Cement’s consolidated volumes increased by 21% YoY to 1.03mt, while cement realization/ton increased 6% YoY/declined ~3% QoQ to Rs4,585 – both were broadly in line with our estimates. Total cost/ton increased 25% YoY/8% QoQ to Rs4,530 (Emkay est.: Rs4,410). The company reported loss of Rs423mn. In H1FY23, the company generated negative FCF of Rs1.5bn post working capital blockage of Rs751mn and capex spend of Rs633mn. Net debt decreased by Rs308mn to Rs11.8bn as of Sep-22. What we liked: Superior volume growth; What we did not like: Higher-than-expected cost pressure and downward revision of FY23E EBITDA guidance.

Earnings call KTAs: 1) Management stated that prices have witnessed an uptick of Rs10/bag in Odisha and Rs15-20/bag in South India and Maharashtra in Oct-22. However, prices have been flat in Indore; 2) Net debt declined by Rs308mn QoQ to Rs11.8bn as of Sep-22. Management mentioned that the current debt level is at its peak, since it includes Rs5bn borrowed towards the acquisition; 3) Management has maintained its volume guidance of 5mt, implying volume growth of ~50% for H2FY23. However, in a worst-case scenario, it may decline to 4.75mt, implying 35% volume growth for H2FY23; 4) It also expects robust demand in South India for the next two years due to elections and expects volumes in South India to touch preCovid levels by H1FY24. Moreover, demand has started picking up in UP, and management expects demand growth to outpace supply, driven by infra spends; 5) Management has revised downwards its EBITDA guidance of Rs4bn due to input cost pressures and slower ramp-up of new units. However, it will provide more clarity in the coming quarters; 6) The company expects savings of Rs250/ton in Q3 due to the decline in fuel costs; 7) Andhra Cement issue is likely to be resolved by the end of Q3. The company has limestone reserves of 165mt; 8) Trade mix has declined to 57% in Q3 and management plans to again increase it to 65% in the coming quarters; 9) Sales mix for the quarter stood at 50% in Andhra Pradesh/Telangana, 16% in Tamil Nadu, 9% Karnataka, 7% each in Odisha and Madhya Pradesh, and 6% in Maharashtra; and 10) Management is targeting to increase the share of blended cement to 70% in the next few years.

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