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Ramp up in capacities and price hike to aid margins

Sagar Cements Limited (SCL), established in 1985, is a south India based cement manufacturer with a capacity of ~10.5MT (South-8.1MT, Central1MT, East-1.5MT). SCL has a total captive power capacity of 66.85MW

• We maintain our Accumulate rating with a target price of Rs. 274, considering the expected improvement in utilisation and margin.

• Q2FY24 revenue grew by 24%YoY, mainly due to volume improvement (27%YoY) aided by new capacities.

• Higher utilization and lower input prices supported operating profit to increase to Rs.60cr vs. Rs. 6cr YoY.

• Net loss narrowed to Rs.11cr vs. Rs.42cr YoY. Margin improvement to continue in the coming quarters owing to better volume growth from the new capacities and the recent price hike.

• Newly acquired, Andhra Cement’s grinding unit (2.25MT) was operationalized in April, while clearance of land monetization of 107 acres (part of the acquisition) is expected to be completed in ~15 months (Rs.4 crore per acre).

• SCL has guided for an EBITDA/ton of Rs.800 for FY24 (Rs.314 in FY23). We expect revenue/PAT to grow at a 22%/120% CAGR over FY23-25E and value SCL on SoTP basis, with cement business at ~9x FY25E EV/EBITDA.

Strong revenue growth aided by ramp up in new capacities.

Q2FY24 revenue growth improved by 24%YoY, mainly due to volume growth of 27% aided by new capacities while realisation declined by 2.5%YoY.The capacity utilization of the new units, Jeerabad was at 65%, while Jajpur was at 26% and the recently acquired Andhra Cement utilization was at 22%. The company expects the utilization of these new capacities will further improve in the H2FY24 and targets total sales volume of ~6.2Mn ton (+29%YoY) in FY24. We expect revenue to grow at a 22% CAGR over FY23-25E.

Lower fuel prices and ramp up in new capacities aided margins

Operating profit improved to Rs.60cr compared to Rs.6cr in YoY quarter as EBITDA margin improved to 10% from ~1% YoY. The margin improvement was mainly due to the reduction in fuel costs along with ramp up in the newly acquired capacities. EBITDA/ton improved to Rs. 459 (vs. Rs. 55 YoY, Rs. 258 QoQ). Total expenses/ton declined by 11%YoY, while realisation declined by 2.5%YoY. Pet coke average prices for Q2FY24 have declined by ~39% YoY. The fuel prices have been witnessing some upward trend recently. However, the company expects margins to improve further in 2HFY24 mainly on account of the operating leverage from the ramp up in the new capacities including Andhra cement along with the recent price hikes in the operating regions. We expect EBITDA margin to improve to ~13%/16% in FY24E/FY25E (Vs 7%/17% in FY23/FY22). Adverse price movements in cement, fuel and RM prices are the key risks.

Valuation & Outlook

SCL’s capacity expansion, coupled with the healthy demand outlook given strong GoI focus on Infra & Housing and pre-election spending, will aid future volume growth. The gross debt is Rs.15.3bn (net debt at Rs.13.8bn) and Debt/Equity is 1.0x. Ramping up of new capacities along with higher realisation will aid further margin improvement. We value SCL on SoTP basis, with cement business at ~9x FY25E EV/EBITDA, to arrive at a Target of Rs. 274, maintain Accumulate rating

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