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Consecutive weak performance distorts earning visibility for FY23E

Result Synopsis

Result Synopsis

Sagar Cements (SGC) reported sequential volume degrowth of 13% (+21% y/y) due to erratic monsoon in Q2FY23. Similarly, NSR corrected sequentially by ~3% q/q (+6% y/y) translated into revenue of Rs4.7bn, declined by 15% q/q (+29% y/y). Total cost/te surged by 8% q/q (+25% y/y) due to elevated power cost/te (+22% q/q & +68% y/y) dented EBITDA/te by 89% q/q (92% y/y) to Rs55. EBITDA de-grew by 91% q/q and y/y both to Rs57mn and reported adj. net loss of Rs423mn due to higher finance cost. In H1FY23, EBITDA/te declined by 69% y/y to Rs300, owing to elevated power cost (Rs1,991/te; +63% y/y) eroded the earning visibility for FY23E. As a result, we have trimmed our EBITDA estimate for FY23E by 60% to Rs1.8bn. With trimmed EBITDA and higher finance cost, we expect SGC to report a net loss of Rs594mn (earlier Net profit of Rs1.5bn) in FY23E. While we have reduced revenue estimates by 9% on account of missing volume guidance of 5MT for FY23E. Newly added capacities in MP & Orissa will allow SGC to lower the southern exposure and grow beyond south markets. Also, higher blended cement dispatches from the East/Central units will improve the overall blending ratio (guided ~60% for FY23E) and will improve the utilization of south clinker units. SGC borrowed Rs5bn for acquiring Andhra Cement bloated the finance cost for the near term, while the acquisition process is expected to finalize by the end of Q3FY23E, if all approvals are received timely. With this acquisition, SGC will be on track to achieve ~10MTPA capacity by FY25E (2x in the last 10 years). Given the lower capex we expect an FCF of Rs2.1bn over FY23-24E, aids to deleverage the B/S. We retain our BUY rating with a TP of Rs256, valuing the stock at 7.5x EV/EBITDA on the FY24E

Result Highlights

New capacities helped cement volume to grow by 21% y/y to 1.03MTPA, while ongoing monsoon resulted in sequential decline of 13% (v/s YSEC est. of 1.13MT) in Q2FY23.

SGC reported healthy NSR growth of 6% y/y but sequentially corrected by 2.5% in Q2FY23. As a result, revenue grew by 29% y/y to Rs4.7bn in Q2FY23 but declined by 15% q/q due to muted volume and NSR.

Power cost increased by 68% y/y and 22% q/q took the overall cost/te to Rs4530, up by 25% y/y and 8% q/q in Q2FY23. As a result, EBITDA/te sharply declined by 92% y/y and 89% q/q to Rs55 in Q2FY23

SGC reported an EBITDA of Rs57mn lower by 91% y/y and q/q both (v/s YSEC est. of Rs441mn) translating into an EBITDA margin of 1.2% in Q2FY23. Reported adj. net loss of Rs423mn in Q2FY23

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