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Net loss continues even after higher-thanexpected revenues

Result Synopsis

Sagar Cements (SGC) beat our revenue estimate by +8% as volume spurt by +67% y/y to 1.24MT (+13% higher than YSECe). Total cost came +9% higher than our estimate due to incremental volumes resulting in-line EBITDA of Rs476mn. Whereas, due to higher depreciation (+82% y/y) & interest cost (+180% y/y), SGC continued to report a net loss of Rs220mn in this quarter. SGC’s total cost/te increased by +10% y/y led by inflated fuel costs, while it moderated sequentially by 6% due to reduction of power cost/te by +23% q/q and other cost/te by 11% q/q. As a result, EBITDA/te declined by 38% y/y but sequentially improved by 6x to Rs384 (11% below YSECe due to 4% lower NSR than YSECe). SGC borrowed Rs5bn for acquiring Andhra Cement, which increased the finance cost for the near term. Whereas management expects the acquisition process to finalize by the end of FY23E and post that finance cost is expected to come down.

With this acquisition, SGC will accomplish its target of ~10MTPA capacity, a year before FY25E. We are positive on SGC and believe that ramp up of newly added capacities in MP & Orissa will reduce its southern exposure and grow beyond south markets. As a result, we expect SGC volume to grow at ~17% CAGR over FY23-25E (excl. volume from Andhra Cement). Also, higher blended cement dispatches from the East/Central units will improve the overall blending ratio (guided ~60% for FY24E) and will improve the utilization of clinker units in the south. Given the lower capex guidance, we believe SGC to generate FCF of Rs8.1bn over FY24-25E, which will aid to deleverage the B/S. We rolled forward our estimates to FY25 and arrived at a price target of Rs271, valuing the stock at 7.5x EV/EBITDA on FY25E

Result Highlights

* SGC delivered volume growth of +67% y/y and +20% q/q to 1.24MT aided by ramp up of newly added capacities in Orissa (Jajpur) and MP (Satguru).

* NSR improved by 4% y/y and 1% q/q but came 4% below YSECe to Rs4645/te. As a result, Revenue grew by +73% and +21% to Rs5.76bn (+8% higher than YSECe).

* EBITDA grew by +3% y/y (7.3x q/q) to Rs476mn (In-line with YSECe) translates to EBITDA/te of Rs384 in Q3FY23 v/s YSECe of Rs431/te (missed due to lowerthan-expected NSR).

* Due to higher depreciation and interest cost coupled with lower margins, SGC continues to report net loss of Rs220mn (v/s YSECe of Rs191mn net loss) v/s net loss of Rs423mn in Q2FY23 and net profit of Rs53mn in Q3FY22.

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