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Latest acquisition to further solidify presence in south…

About the stock: Sagar Cements is a south based cement player with cement capacity of 8.25 MT (excluding Andhra Cements). Region wise, AP/Telangana accounted for ~60% of sales followed by Tamil Nadu (16%), Karnataka (9%).

* Going forward, the company will be able to develop a presence in the fastergrowing eastern market and the more profitable central market with recent commissioning of new 2.5 MT capacity 

* Self-reliance in power (61.5 MW), ability to switch between coal and petcoke for fuel requirement and split grinding units near market gives it cost advantage

Key highlights: NCLT has approved resolution plan for acquisition of Andhra Cements by the company, which would help achieve its target of 10 MT by FY25E.

* SCL would be acquiring an integrated unit, with clinker capacity of 1.65 MT and cement capacity of 1.8 MT along with 30 MW captive power plant located at Guntur District, AP (DCW). It will also acquire a grinding unit, with capacity of 0.8 MT at Vizag, AP (VCW, contemplating discontinuing this plant and might look to monetise the land in the medium term) 

* It is expected to spend ~| 762 crore towards acquisition and restarting capex of | 85 crore. Further, the board has also approved an additional capital outlay of | 468 crore for enhancement of the clinker capacity to 2.3 MT and cement capacity to 3 MT for its DCW unit

* Overall capex of ~ | 1400 crore to be spent over the next three years with acquisition cost coming in at US$56/t (vs. greenfield implementation cost of US$100/t). Recent commissioning of new capacities (2.5 MT in central & East) and latest acquisition of Andhra Cement would propel healthy volume CAGR of 23% in FY22-25E

* On the balance sheet front, we expect the company to generate OCF worth | 1160 crore (ex-interest cost) in FY23-25E vs. overall capex at ~ | 1480 crore during the same period. Hence, we expect debt to remain elevated (D/E expected at 0.9x in FY25E)

What should investors do? With capacity expansion in high growth regions like east & central, we expect strong growth momentum, going forward

However, higher debt levels are expected to pose challenges in the medium-term. Hence, we maintain HOLD rating on the stock

Key triggers for future price performance:

* Incremental volumes from new units (1MT ICU at MP, 1.5 MT grinding unit in Odisha and 1.8 MT in AP) to help grow the business from FY24E onwards

*  Expect sales revenue CAGR of 25% during FY22-25E led by 23% CAGR growth in volumes

Alternate Stock Idea: Apart from Sagar Cement, in our cement sector coverage we like Shree Cement

* BUY with a TP of | 28500

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