Buy Sagar Cements; target of Rs 1100: KR Choksey

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26 Aug, 2025 12:21

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KR Choksey's research report on Sagar Cements

We visited the Mattampally plant of Sagar Cements Ltd and attended the AGM of the company on 22nd September, 2017. We had the privilege to meet the top Management including the company’s Executive Director – Mr. Sreekanth Reddy, CFO – Mr. K. Prasad and Vice President (Works) - Mr. DSNV Prasad and we came back with much more confidence regarding the business strategies of the company going forward. 1) In terms of regional overview, AP & Telangana continue to grow at a robust pace of ~12-15% primarily on account of higher Government spending while demand remains sluggish in other southern states of Tamil Nadu, Karnataka and Kerala. 2) The company achieved a volume growth of 1.5%/15.3% in July/Aug 2017 on account of healthy demand scenario in AP & Telangana coupled with high capacity utilization levels (~85%) at Bayyavaram unit. The management is confident of completion of brownfield expansion at BMM unit (by FY18 end) and Bayyavaram unit (by H1FY19) resulting into its capacity increasing from 4.3 MTPA currently to 6 MTPA by H1FY19. Consequently, we factor in a volume growth of 23.13% from 2.20 MT to 3.34 MT  over FY17-FY19E for the company.  3) The company has successfully commissioned WHRS of 6 MW at Mattampally unit and is confident of setting up of CPP of 18 MW by H1FY19 leading to substantial cost savings. Likewise, we expect total cost of production/ton to decline from INR 3195 in FY17 to INR 3061 by FY19E despite factoring in a hike of 20%/10% in pet-coke prices/diesel costs over the same period.   4) Key focus for the management is to grow prudently with a long term target of increasing its manufacturing capacity from 4.3 MTPA currently to 10 MTPA by 2025.

Outlook
With an expected net debt of INR 3113.2 mn by FY19E, the company trades at an EV/EBITDA of 6.92x and EV/ton of $50. The company possesses one of the strongest balance sheet (net debt/equity of 0.34x by FY19E) among its peers providing significant headroom to grow. We believe that the company should fetch premium valuations on account of i.) good brand presence in operating regions, ii.) outperforming volume growth, iii.) sharp pick up in operating efficiencies, iv.) financial de-leveraging, and v) surge in return ratios. The company remains our preferred pick among small cap cement stocks and we maintain our conviction BUY rating on the stock. We have revised our implied valuation on the stock and value Sagar Cements Ltd at an EV/EBITDA of 8x and EV/ton of $70 on FY19E arriving at a target price of INR 1100 which is an upside of 34% from CMP of INR 822. Further, valuations are subject to re-rating depending upon improvement in operating margins.
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