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Healthy volumes and lower input prices aid margins.

Sagar Cements Limited (SCL), established in 1985, is a south India based cement manufacturer with a capacity of ~10.6MT (South-8.1MT, Central1MT, East-1.5MT). SCL has a total captive power capacity of 96.96MW.

* We maintain our BUY rating with a target price of Rs 258, factoring in healthy volume and margins.

* Q4FY24 revenue grew by 14%YoY, aided by healthy volume improvement (19%YoY). However, realization dropped by 4%YoY.

* Lower fuel prices, along with healthy volumes, aided operating profit to increase by 75% YoY. EBITDA margin improved by 340bps YoY to 9.6%.

* Cement prices are expected to improve post monsoon. This along with reduction in fuel prices, will aid margin improvement further.

* Clearance of land monetization of 107 acres (part of the Andhra Cements acquisition) is expected to be completed by the end of FY25 (Rs.4 crore/ acre). SCL also expects ~Rs.210cr incentive from the government over a period of ~7years for its Jeerabad plant (MP) starting from Q2FY25.

* Expect revenue/EBITDA to grow at a 13%/44% CAGR over FY24-26E and value SCL on SOTP basis, with cement business at ~8.5x FY26E EV/EBITDA.

Healthy volumes drive revenue growth amidst falling prices.

Q4FY24 revenue grew by 14%YoY, aided by volume growth of 19% YoY. This was supported by ramp up in new capacities. The capacity utilization of the new units improved, Jeerabad was at 82%, Jajpur was at 35% and Andhra Cement was at 40%. However, realization dropped by 4% YoY due to a slowdown in demand on account of the general election and more specifically state election in Andhra Pradesh. The company has revised the volume guidance for FY25 from 7MT to 6.5MT. Revenue is expected to grow at a 13% CAGR over FY24-26E supported by a ramp up in new capacities, including Andhra acquisition.

Lower input and fuel prices aids margins.

Operating profit rose by 75%YoY as EBITDA margin improved to 9.6% from ~6.3% YoY. Total expenses/ton declined by ~7%YoY, while realisation dropped by 4%YoY. Power & fuel expenses (40% of total expenses) reduced by 14%YoY. EBITDA/ton improved to Rs. 423 vs. Rs. 287 YoY. Higher EBITDA/ton was influenced partly by improved cost management and fuel cost savings, as well as operating leverage. The company’s investments aimed at increasing the share of green energy and WHRS capacity in the overall mix, along with the deployment of electric trucks and wheel loaders will improve margins in the future. Expect an improvement of Rs. 100 in EBITDA/ton in Q1FY25 vs Q4FY24, majority of which will be from power & fuel because fuel prices are trending down. We expect EBITDA margin to improve to ~14%/16% in FY25E/FY26E (Vs ~10%/7% in FY24/FY23). Adverse price movements in cement, fuel and RM prices are the key risks.

Valuation & Outlook

SCL is currently undertaking a capex of ~Rs.5bn over FY25-26. However, SCL expects the net debt to remain at Rs. 13bn and Debt/Equity at 0.7x. The healthy demand outlook along with SCL’s consistent focus on lowering costs and improving operational efficiencies will aid growth and margins. We reiterate our BUY rating and value SCL on SOTP basis, with cement business at ~8.5x FY26E EV/EBITDA, to arrive at a revised target price of Rs. 258.

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