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Sagar cements (SGC) reported good set of numbers for 2QFY24 as reported EBITDA came in at Rs602mn, up 97% QoQ and 105% above our estimate. Better than expected volumes and lower costs resulted in this sharp beat. Recently acquired Andhra cement plant contributed positively with better than expected volumes as well as profitability. The management has lowered its volume guidance from 6.4mn mt to 6.2mn mt for FY24, however maintained its FY24 EBITDA estimate of Rs4bn. As a result, 2HFY24 is expected to be better on account of better volumes as well as better pricing given the recent uptick in price in Andhra and Telangana region. We have tweaked our estimates marginally and have moved our valuation to Sep 25 to arrive at our revised target price of Rs255 (Rs231 earlier). We maintain Reduce rating on the stock.

SGC – 2QFY24 result highlights

SGC reported good set of numbers for 2QFY24 driven by strong volume growth, turnaround of operations at Andhra cements and lower than expected costs. SGC reported EBITTDA of Rs602mn vs our expectation of Rs294mn (EBITDA/mt of Rs459). Recently acquired Andhra cement reported EBITDA of Rs77mn and EBITDA/mt of 818/mt. Volumes came in at 1.31mn mt, 10% ahead of our estimates and up 27% YoY. Revenue came in at Rs5.8bn which was up 24% YoY. Realization at Rs4,471/mt was down 2.5% on a QoQ basis. Power and fuel costs/mt declined by 17% YoY mainly due to reduction in coal and petcoke prices. Operating cost/mt at Rs4,012 reduced by 11.4% YoY and 7% QoQ. Company reported net loss of Rs105mn against our estimate of Rs379mn. Exceptional item included impairment reversal of Rs148mn.

FY24 volume guidance lowered to 6.2mn mt from of 6.4mn mt

The management has guided for 6.2mn mt volumes in FY24 (lower from earlier guidance of 6.4mn mt) and Rs4bn EBITDA. So volume growth as well as profitability is likely to accelerate in 2HFY24. The management cited upcoming state elections in Telangana as a reason for softness in volumes. The management maintained its EBITDA guidance of Rs4bn which means the company will have to deliver 3.7mn mt of volumes and Rs3.1bn EBITDA in 2HFY24 vs 2.5mn mt of volumes and Rs907mn EBITDA reported in 1HFY24.

Next set of capacity expansion in Andhra cement deferred

Existing capacity of SGC excluding Andhra cement is 8.25 mn mt. Recently acquired Andhra cement plant capacity is 1.8mn mt (excluding Vizag GU) which was planned to increase to 3 mn mt. This coupled with brownfield expansions at Gudipadu (AP) and Jeerabad (MP) would have taken total capacity of the company beyond 12mn mt. Peak net debt is expected to remain around Rs15bn.

Maintain Reduce rating with TP of Rs255

While we are confident of successful transformation of acquired assets by SGC given its track record, we believe that near term earnings will remain depressed. Additionally, higher debt and weak profitability in south is also likely to weigh on margins. While cement prices have increased recently in south, sustainability is an issue given competition. We value the stock based on 8x FY25 EV/EBITDA to arrive at our revised TP of Rs255 (Rs231 earlier). We believe that current valuations of FY25E EV/EBITDA of 10.9x is higher and we maintain Reduce rating.

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