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Our View:

* Sagar Cements continues to deliver consistently strong nos. as company’s volume/EBITDA growth during the quarter stood at ~22%/134% y/y respectively. Volumes came in at 1.02 MT which was 2.3% above our estimates while absolute EBITDA stood at Rs 1,043 mn which was 7.4% ahead of our expectations. EBITDA/te at Rs 1,019 witnessed a decline of 16% sequentially on account of pricing pressure but improved by 91% y/y (low base). Sagar also marked an exceptional end to FY21 with overall volumes flat y/y at 3.16 MT but EBITDA surging by 116% y/y to ~Rs 4 bn.  

* Company is also on the verge of commissioning 1 MTPA integrated unit at Indore and 1.5 MTPA grinding unit at Odisha which is expected to be completed by Sep‐ 21. This would not only diversify geographical volume exposure of the company but would also provide sustainability to the business model of Sagar as Central market is a high profitability region for cement players while demand continues to be extremely robust in Eastern market. Post the commissioning, company would scale to a capacity of 8.25 MTPA.  

* Going ahead, we factor in volume/EBITDA CAGR of 30.1%/2.4% over FY21‐ FY23E. Our EBITDA growth expectation remains conservative as we factor in pricing decline in AP and Telangana during FY22E‐FY23E relative to FY21 base. Accordingly, we factor in EBITDA/te of Rs 798/Rs 784 for FY22E/FY23E respectively vis‐à‐vis Rs 1267 for FY21. However, in a scenario if strong pricing scenario sustains in the Southern market, it would subsequently lead to earnings upgrade for the company going ahead. On the balance sheet side, we expect company to materially deleverage over FY21‐FY23E with net debt/EBITDA declining from 1.4x to 0.9x during the same period.

* At CMP of Rs 780, Sagar is trading at EV/EBITDA of ~5.3x on FY23E. We assign an EV/EBITDA multiple of 7x on FY23E and arrive at TP of Rs 1,051/share with potential upside of 35%. We maintain our BUY rating on the stock.

* Key Risk:

Further lockdowns across states due to second wave of COVID would hamper volume growth and timelines of capex commissioning

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