Buy Sagar Cements Ltd For Targert Rs. 260 - Sushil finance
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Access to resources and geographical expansion to play a vital role going forward
SCL is a part of Nalgonda & Yerraguntla cement cluster; one of the key cement production areas of India, strategically located near coal mines & ports. SCL also has strong limestone reserves of nearly 625 MT. SCL also has 66.85 MW of captive power which enables the company to have smooth access to power and at a relatively lower costs. Furthermore, SCL has recently commissioned new plants in Madhya Pradesh and Odisha, thereby, expanding its reach to eastern & central regions.
Strong demand from infrastructure & real estate projects to drive the volume growth
The Govt has allocated 35% higher capex and proposed infrastructure spend of over Rs.10 lakh crores for FY23. Furthermore, it plans to construct 25,000 kms of roads & highways during the current fiscal, together with continued execution of projects under the Bharatmala & other infrastructure programs, also auger well for the cement industry. On the realty front, the PMAY is getting prime focus. Following the recent revival in realty sector, the inventory in the top cities is rapidly coming down.
Robust fundamentals provide financial cushion for propel top-line growth
SCL’s OCFs have witnessed a steady increase over the last several years from Rs.101 cr in FY17 to Rs.377 cr in FY21. Although the FCFs have remained negative due to continuous capex. The company had recently expanded its capacity from 5.75 MT to 8.25 MT, with a mix of debt-equity. Although, the debt has increased from Rs.552 cr in FY21 to Rs.1,340 cr in FY22, the debtequity remains at reasonable 1.2x.
OUTLOOK & VALUATION
SCL is a leading cement manufacturer based in Hyderabad and has a dominant position in South India; the company has an installed production capacity of 8.25 MTPA and caters to several markets including Telangana, Andhra, Karnataka, Maharashtra, Chhattisgarh, Odisha, Jharkhand, Madhya Pradesh, Tamil Nadu & Gujarat. The company aims at doubling its capacities every decade. During FY22, SCL added capacity of 2.50 MTPA. Further, the Govt has allocated 35% higher capex & proposed infrastructure spend of over Rs.10 lakh crores for FY23; the government’s plan to construct 25,000 kms of roads & highways along with schemes like Bharatmala, PMAY would continue to drive demand for cement in the future. Going forward, we expect the company to deliver an EBITDA of Rs.503.8 cr in FY24; assigning a target EV/EBITDA multiple of 9.0x we arrive at a target price of Rs.260 showcasing an upside potential of ~26% from current levels with an investment horizon of 18-24 months.
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