Equity Research: Sagar Cement

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, East- 1.5MT). SCL has a total captive power capacity of 66.85MW.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 the last 5Yrs.

ABOUT:

• 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, East- 1.5MT). SCL has a total captive power capacity of 66.85MW.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 the last 5Yrs.

• 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.

• SCL has established a strong distribution network with 2,244 dealers, 4,501 sub-dealers and 58 C&F agents. The company has established a strong distribution network with 2,244dealers, 4,501sub-dealers and 58C&F agents.

• Cement manufactured: 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.
• Region wise presence:

SHAREHOLDING PATTERN:

GROWTH PROSPECTS:

1.    Expansion strategy in fast growing regions: -

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.  The expansion was through organic and inorganic routes. The recent expansion of total 2.5MT was through acquisitions (Satguru Cements -1MT in Madhya Pradesh and Jaipur Cements- 1.5MT in Odisha). Towards this, the company has raised Rs. 5bn in debt & Rs. 3.5bn as equity for a potential acquisition to complete by Q3FY23 (Andhra Cements-2.6MT).

2.    Cost reduction

Various cost reduction initiatives taken by the company in past years like captive thermal power plant, increase in green power & blended cement mix along with the higher cement prices aids margin improvement have brought down total expenses per ton from Rs. 3,271 in FY18 to Rs. 3,078 in FY21 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.

3.    Adequate limestone reserves and captive power capacity

Limestone, fuel (coal/pet coke), minerals, and energy form the primary raw materials for cement production. So, the uninterrupted supply of these materials is crucial for the cement sector. SCL has adequate limestone reserves in proximity to its plants, over 401 Mn Ton in Telangana, over 161 Mn Ton at Gudipadu (AP) and 62 Mn Ton at Jeerabad (Satguru) which can support the company's future expansion plans. The company also has easy access to fuel (coal) and packaging material is sourced from a Group entity

4.    Increasing mix of green power to reduce Power & Fuel cost

Price of raw materials like Coal and Pet Coke which are close to 30% of the cost of production, have a significant impact on the performance since they are primarily driven by the external market forces. To reduce the external dependence on power, the company has over the years reached a total thermal power capacity of 43MW and green power capacity of 24.85MW. SCL currently generate upto 18% through WHR (Waste Heat Recovery) and with the new acquisition Satguru is fully operational the WHR contribution would be 20%. Total renewable contribution including hydro and solar is 25% at group level and SCL’s exposure to grid power is only limited, helps to reduce Power & Fuel cost. SCL targets to add up ~500bps for every 5 years to reach 50% mix for green power. Current power blended cost per unit is Rs. 3.50.

5.   Increasing Blended cement mix

SCL is gradually improvising the blended cement sales ratio which is currently at 50% Vs 45% YoY. Blended cement mix will improve to 55% post the recent acquisitions as Jajpur unit (Odisha) is 100% blended cement and Satguru Cement (Madhya Pradesh) is 90% blended. Higher the blended cement ratio lower will be the cost of manufacture, leading to improvement in margins. The recent acquisition of Odisha plant will be largely producing slag cement.

FINANCIALS:

Revenue growth was strong at 21% CAGR in last decade and at 11% CAGR in last 5 Yrs. The growth was mainly supported by capacity additions through organic and inorganic routes. Volumes have grown at 9% CAGR in last 5 Yrs. Started with a single plant in Telangana, the penetration to other parts of South India has aided revenue growth. Now, diversification to higher growing regions like East & Central will further boost the growth. We expect total revenue to grow at 23% CAGR over FY21-24E aided by ramp up in recent acquisitions, higher blended product mix and higher realization.

EBITDA margin has improved from 12% to 29% during FY19-FY21. The improvement in margin was mainly due to the reduction in Power & Fuel cost on account of cost reduction initiatives of the company along with benign fuel prices and reduction in freight cost on account of decrease in lead distance. However, the sharp inflation in input prices impacted FY22 margins which is likely to continue in the short-term. 

ANALYST COMMENT:

SCL saw a sharp re-reating during FY17 to FY18 which was based by the company's initiatives for strenngthening expansion in southern region & new localities, but due to COVID-19 it witnessed correction in FY20. Now, the recovery from the pandemic & normalisation of economy are the key factors for its further valuation. Current input price scenario can have an impact on the margins but SCL's cost reduction initiatives are expected to reduce margin pressure. We expect SCL to show 7x growth in FY24E. Hence, we assign "BUY" position.

SOURCES:

https://www.sharescart.com/company/sagar-cements/

https://www.bseindia.com/bseplus/AnnualReport/502090/73096502090.pdf

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