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Small player…spreading wings

Sagar Cements Limited (SCL), established in 1985, is a south India based cement manufacturer with a capacity of 8.25MT (South-5.75MT, Central-1MT, East1.5MT). SCL has total captive power capacity of 66.85MW

• Industry capacity utlisation to reach back to pre-covid levels in FY23E, given normalisation of the economy and GoI’s strong focus on housing & Infra.

• SCL’s capacity has grown at 10% CAGR and reached 8.25MT, and targets ~10MT by FY25. Revenue/PAT grew at a CAGR of 11%/28% during last 5Yrs

. • To diversify footprint, SCL has recently added capacity in East & Central regions through acquisitions. Further, SCL has recently raised Rs. 5bn in debt & Rs. 3.5bn as equity for a potential acquisition (Andhra Cements-2.6MT)

. • The sharp rise of input prices is impacting margins, expected to decline to 15.9% in FY23 but will improve to 20.4% in FY24. Additionally, SCL’s cost reduction initiatives will reduce margin pressure.

• We initiate SCL with a Target of Rs.226, at 7x FY24E EBITDA (3Yr Avg=7x). Recommend BUY considering capacity expansion & cost reduction benefits.

Industry demand crossed pre-covid levels, SCL to outperform

The cement industry volumes have grown at 4.4% CAGR in the last 5Yrs despite a sharp de-growth of ~11%YoY in FY21 due to Covid-19 lockdown. FY22 witnessed a strong volume growth of 17% YoY aided by pend up demand and GoI’s push for infra & housing. The industry volumes have already crossed pre-covid levels by ~3% in FY22. Given normalization of the economy and higher budget allocation towards capex (+35% YoY to Rs.7.5 trillion in FY23) and affordable housing (Rs.48,000cr in FY23 Vs 27,500cr YoY), cement demand is expected to grow at ~7 to 8% over FY22-FY23E. SCL is expected to outperform aided by market share gains with newly added capacities.

Expansion strategy in fast growing regions

SCL targets to double its capacity every 10 years. From 0.2MT in 1985, SCL has expanded its capacity to 8.25MT, grown at a CAGR of ~10% and targets ~10MT capacity by FY25. After having a strong footprint in Southern region, SCL started spreading its wings beyond South India to have regional diversification and higher growth. The recent acquisitions were in fast growing regions like East and Central.

Strong focus on cost reduction…high input prices will impact short-term.

The various cost reduction initiatives like captive thermal power plant, increase in green power & blended cement mix along with the higher cement prices aids margin improvement. EBITDA margin improved sharply to 29% in FY21 from 5Yr avg of 14.5% due to benign costs and cost savings but declined to 17% in FY22 due to sharp surge in input prices. We expect EBITDA margin to decline to 15.5% in FY23 but will improve to ~20% in FY24 as the input prices have peaked out.

Adequate limestone reserves and captive power capacity

SCL has adequate limestone reserves in proximity to its plants, over 401 Mn Ton in Telangana, over 160 Mn Ton in AP and 62 Mn Ton in MP which can support company’s future expansion plans. SCL has captive power to fully source its power requirements with total power capacity of 66.8MW (non-renewable-43MW & renewable 23.8MW).

Valuation & Outlook:

 We expect H1FY23 is likely to be impacted with lower margins but is expected to be better in H2FY23, given recent correction in input prices and strong GoI’s focus on housing & infra. Expect Revenue & Earnings to grow at 27% & 53% CAGR during FY22- 24E. We value the stock at 7x FY24E EBITDA (3Yr avg=7x) to arrive at a Target of Rs.226 and recommend a BUY rating.

company background 

 Sagar Cements Limited (SCL), established in 1985, is a south India based cement manufacturer with a total installed production capacity of 8.25MT (South-5.75MT, Central-1MT, East-1.5MT) including recent acquisitions of Satguru Cements (1MT in MP) and Jaipur Cements (1.5MT in Odisha). The company has total limestone reserves of ~625MT, clinker capacity of 4.5MT, total captive power generation capacity of 66.85MW including green power capacity of 23.85MW. The company has established a strong distribution network with 2,244 dealers, 4,501 sub-dealers and 58 C&F agents.

Products

• Ordinary Portland Cement (OPC)- 53 grade & 43 grade

• Portland Poxzzolana Cement (PPC).

• Portland Slag Cement (PSC)

• Composite Cement

• Special Cements including Sulphate Resistent Cement (SRC)

• Ground Granulated Blast Furnace Slag

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