ICICI Direct is bullish on Sagar Cements has recommended buy rating on the stock with a target price of Rs 700 in its research report dated February 04, 2019.
ICICI Direct's research report on Sagar Cements
Sagar Cements’ results were a mixed bag. Though robust demand from infra fuelled the volume growth by 35.3% YoY to 0.92 MT, prices remained weak (down by 5.4% YoY to Rs 3470/t). As a result, revenues increased 28% YoY to Rs 319 crore (vs. I-direct estimate: Rs 320.4 crore)• Margins were under pressure with EBITDA margin falling 322 bps YoY to 9.4% (vs. I-direct estimate: 12.3%) mainly led by higher raw materials expenses up 73% YoY to Rs 70 crore and 28% YoY on a per tonne basis to Rs 760/t in Q3FY19 from Rs 596/t in Q3FY18. EBITDA/t declined 29.5% YoY to Rs 328/t (vs. I-direct estimate of Rs 439/t) • The company posted a net loss of Rs 3 crore (below I-direct estimate of Rs 2.4 crore profit) vs ~Rs 3.0 crore PAT in Q3FY18. The 18MW CPP at Mattampally is expected to get commissioned by June 2019. During the quarter the company announced capacity expansions by acquiring stake in two companies, one each in the east and central region.
The company generates ~40-50% of its sales from Andhra Pradesh and Telangana. These markets have the highest allocation of low cost housing under PMAY scheme and have also done heavy spending on irrigation and other infra projects. As a result, we expect cement demand in these regions to remain healthy in the next two years. Further, cost rationalisation through installation of WHR, captive power plant at Mattampally and expansion of grinding unit should help improve margins, going forward. The recent correction in stock price has led the stock to trade at attractive valuations (i.e. FY20E EV/tonne of US$46/t way below the current replacement cost). Hence, we maintain our BUY rating on the stock with a revised target price of Rs 700/share (i.e. valuing at FY20E 9.5x EBITDA, EV/tonne of US$5.
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