Sagar Cements Ltd. BUY - 1 of 21 - Friday 01 st July, 2016 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. STOCK POINTER Target Price ₹941 CMP ₹680 FY19E EV/EBITDA 6.1x Index Details Sagar Cements Ltd. (Sagar) is a cement manufacturer with a dominant presence in South India. We believe that the cement industry is on an up-turn and expect Sagar to be a key beneficiary. We are positive on the company given that: i) The cement industry is on the verge of a turn-around: South India (which accounts for ~ 70% of Sagar’s revenues) has witnessed a five year lull in cement demand owing to surplus capacities, subdued demand and political unrest over the creation of a separate state, Telangana. However, with the political resolution of Telangana, limited planned capacity additions in the area and an anticipated pick-up in construction and irrigation projects, cement demand in the South is expected to see a revival going forward. We expect key markets of AP, Karnataka and TN to clock 8% CAGR during FY18-19. ii) Sagar has recently completed the acquisition of BMM cements which has a grinding capacity 1 mtpa for Rs 540 crores. It has also received the approval to acquire a 0.2 mtpa grinding unit of Toshali Industries for Rs 60 crores. Post these acquisitions, the grinding capacity of the company will increase to ~4.3 mtpa from 2.75 mtpa. Inorganic growth at the start of the potential cement up-cycle will help the company fully capitalize on the demand potential. Accordingly, we expect revenues to grow at a 3 year CAGR of 16% to Rs 1178 crore by FY19. iii) Freight cost as a % of total revenues is expected to decline from 16% in FY16 to ~13% in FY19 owing to: a) BMM Cements is strategically located such that it can service the Southern markets, while Sagar’s standalone plant can focus on supplies to Maharashtra and Orissa. This arrangement has the potential to reduce the lead distance by ~20% and b) Commencement of the railway siding unit is expected to help the company save ~ Rs 12 crore annually. Sensex 27,144 Nifty 8,328 BSE 100 8,486 Industry Cement Scrip Details Mkt Cap (₹cr) 1,184 BVPS (₹) 316.1 O/s Shares (Cr) 1.7 Av Vol (Lacs) 0.2 52 Week H/L 719/305 Div Yield (%) 0.4 FVPS (₹) 10.0 Shareholding Pattern Shareholders % Promoters 56.93 Public 43.07 Total 100.0 Sagar vs. Sensex 40 140 240 340 440 540 640 740 15000 17000 19000 21000 23000 25000 27000 29000 31000 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Sensex Sagar (RHS) Key Financials (₹ in Cr) Y/E Mar Net Sales EBITDA Adj PAT EPS (Rs) EPS Growth (%) RONW (%) ROCE (%) P/E (x) EV/EBITDA (x) 2016 753 124 46 26.5 -38.5 8.4 9.7 14.7 8.5 2017E 869 147 50 28.8 8.7 8.5 10.7 24.0 10.7 2018E 1,019 192 80 45.7 58.7 12.3 15.1 15.1 7.8 2019E 1,178 230 111 64.1 40.2 15.4 18.4 10.8 6.1
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Sagar Cements Ltd.
BUY
- 1 of 21 - Friday 01st July, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
ST
OC
K P
OIN
TE
R
Target Price ₹941 CMP ₹680 FY19E EV/EBITDA 6.1x
Index Details Sagar Cements Ltd. (Sagar) is a cement manufacturer with a
dominant presence in South India. We believe that the cement
industry is on an up-turn and expect Sagar to be a key beneficiary.
We are positive on the company given that:
i) The cement industry is on the verge of a turn-around: South India
(which accounts for ~ 70% of Sagar’s revenues) has witnessed a five
year lull in cement demand owing to surplus capacities, subdued
demand and political unrest over the creation of a separate state,
Telangana. However, with the political resolution of Telangana,
limited planned capacity additions in the area and an anticipated
pick-up in construction and irrigation projects, cement demand in
the South is expected to see a revival going forward. We expect key
markets of AP, Karnataka and TN to clock 8% CAGR during FY18-19.
ii) Sagar has recently completed the acquisition of BMM cements
which has a grinding capacity 1 mtpa for Rs 540 crores. It has also
received the approval to acquire a 0.2 mtpa grinding unit of Toshali
Industries for Rs 60 crores. Post these acquisitions, the grinding
capacity of the company will increase to ~4.3 mtpa from 2.75 mtpa.
Inorganic growth at the start of the potential cement up-cycle will
help the company fully capitalize on the demand potential.
Accordingly, we expect revenues to grow at a 3 year CAGR of 16% to
Rs 1178 crore by FY19.
iii) Freight cost as a % of total revenues is expected to decline from
16% in FY16 to ~13% in FY19 owing to: a) BMM Cements is
strategically located such that it can service the Southern markets,
while Sagar’s standalone plant can focus on supplies to Maharashtra
and Orissa. This arrangement has the potential to reduce the lead
distance by ~20% and b) Commencement of the railway siding unit is
expected to help the company save ~ Rs 12 crore annually.
Sensex 27,144
Nifty 8,328
BSE 100 8,486
Industry Cement
Scrip Details
Mkt Cap (₹cr) 1,184
BVPS (₹) 316.1
O/s Shares (Cr) 1.7
Av Vol (Lacs) 0.2
52 Week H/L 719/305
Div Yield (%) 0.4
FVPS (₹) 10.0
Shareholding Pattern
Shareholders %
Promoters 56.93
Public 43.07
Total 100.0
Sagar vs. Sensex
40
140
240
340
440
540
640
740
15000
17000
19000
21000
23000
25000
27000
29000
31000
May-1
5
Ju
n-1
5
Ju
l-15
Au
g-1
5
Sep
-15
Oct-
15
No
v-1
5
Dec-1
5
Jan
-16
Feb
-16
Mar-1
6
Ap
r-16
May-1
6
Ju
n-1
6
Sensex Sagar (RHS)
Key Financials (₹ in Cr)
Y/E Mar Net
Sales EBITDA
Adj PAT
EPS (Rs)
EPS Growth (%)
RONW (%)
ROCE (%)
P/E (x)
EV/EBITDA (x)
2016 753 124 46 26.5 -38.5 8.4 9.7 14.7 8.5
2017E 869 147 50 28.8 8.7 8.5 10.7 24.0 10.7
2018E 1,019 192 80 45.7 58.7 12.3 15.1 15.1 7.8
2019E 1,178 230 111 64.1 40.2 15.4 18.4 10.8 6.1
- 2 of 21- Friday 01st July, 2016
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ii) Power cost is expected to decline given that: a) BMM has a 25 MW
captive power plant with a surplus of 15 MW which is sold to AP Genco
b) Coal prices are declining due to increasing emphasis on cleaner
fuels.
iii) With the uptick in demand coupled with lower freight and power
costs, we expect Sagar’s EBITDA margin to expand from 16.5% in FY16
to 19.5% by FY19.
We initiate coverage on Sagar as a BUY with a Price Objective of ₹941,
representing a potential upside of 38% over a period of 18 months. We
have arrived at our target price by assigning an EV/EBITDA multiple of
8x to FY19E EBITDA of Rs 230 crores.
- 3 of 21- Friday 01st July, 2016
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Company Background
Incorporated in 1981, Sagar Cements is a south based cement manufacturer with a
cement capacity of 3 mtpa and a clinker capacity of ~ 2.3 mtpa. It earns ~70% of its
revenues from sales to south India. The company primarily manufacturers the OPC
variety of cement from its plant situated in the Nalgonda district of Telanga and has
a dealership strength of ~1600.
In FY15, it acquired BMM Cements for Rs 540 crores which has a cement capacity
of 1 mtpa and a clinker capacity of 0.7 mtpa. BMM Cements has a 25 MW thermal
captive power plant and a 20 year limestone mining lease. In June 2016, Sagar
received an approval to acquire a 0.2 mtpa grinding unit of Toshali Cements for Rs
60 crores. It further plans to increase the capacity of this unit to 0.3 mtpa at a cost of
Rs 6 crore post acquisitions. Post both these acquisitions, Sagar Cement’s
consolidated capacity will increase ~4.3 mtpa from 2.75 mtpa in FY16.
Sagar Cements– Snapshot
Sagar Cements (Standalone)
FY16 Revenues: Rs 622 crores
Cement:3.0 mtpa
Clinker: 2.3 mtpa
Capacity
Utilization:55%
Capacity Geography Mix Channel Mix Freight Mix
AP & T: 42%
Karnataka:10.5%
TN: 16.8%
Maharashtra: 19%
Orrisa: 9%
Trade: 75%
Non-Trade: 25%
Road: 100%
Source: Sagar Cements, Ventura Research
- 4 of 21- Friday 01st July, 2016
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Key Investment Highlights
Well poised to capture demand revival in the South
Sagar Cements, with a grinding capacity of 4 mn tones (including 1 mn tones post
acquisition of BMM industries) is a dominant player in south India with presence
across all five key states – AP, Telangana, Tamil Nadu, Kerala and Karnataka. In
addition, it has also expanded its geographic wings to Maharashtra and Orrisa.
However, it continues to earn nearly~70% of its revenues from the south.
South India has witnessed a five year lull in cement demand owing to surplus
capacities, subdued demand and political unrest over the creation of a separate
state, Telangana. However, with the political resolution of Telangana, limited
planned capacity additions in the area and an anticipated pick-up in construction and
irrigation projects, cement demand in the south is expected to revive going forward.
Diversifying geographic base, but South continues to dominate
70.8%
53.7% 51.0% 54.0%
38.8% 41.7%
7.0%
13.9%14.0% 11.0%
15.1% 10.5%
5.3%
11.8% 13.3% 10.0%
16.1% 16.8%
9.3%11.8% 13.5% 16.0%
20.0% 19.0%
4.1% 3.8% 3.9% 6.0% 7.1% 8.7%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
FY11 FY12 FY13 FY14 FY15 FY16
AP & T Karnataka TN Maharashtra Orrisa Others
Source: Sagar Cements, Ventura Research
- 5 of 21- Friday 01st July, 2016
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Our industry interactions suggest that while there has been an increase in project
clearances, on-the ground construction activity is yet to pick-up. Barring roads,
which has seen a significant improvement in pace of execution, other infrastructure
projects are yet to take-off. Accordingly, we believe that a real-uptick in cement off-
take will happen from FY18 onwards, when construction of most projects is likely to
be in full swing. Accordingly, we expect cement demand to grow at 6.7% in FY17;
this is primarily attributable to the low base (-1.3% in FY16). We expect an 8%
CAGR from FY18 onwards.
Diversification to faster growing areas a plus
The management has strategically reduced its exposure to Andhra Pradesh from
~71% of total revenues in FY11 to ~40% in FY16. It has expanded its presence in
the Tamil Nadu and Kerala markets which are relatively faster growing, coupled with
an enhanced presence in Maharashtra and Orissa, which are historically lucrative
markets owing to favorable demand-supply dynamics. This strategic shift has
enabled the company to report a 5% revenue CAGR during FY11-16 (standalone)
despite the fact that AP has de-grown at a CAGR of 6% during the same period.
South Industry: Demand likely to revive after a subdued period of 5 years, utilizations to cross 60%
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
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