YES Securities is bearish on Sanghi Industries has recommended sell rating on the stock with a target price of Rs 16.2 in its research report dated June 27, 2020.
YES Securities' research report on Sanghi Industries
Total Volumes during the quarter declined sharply by 32.3% y/y – at 0.48 MT due to Coronavirus inflicted lockdown measures and maintenance shutdown (yet again). Slump in volumes was offset by robust pricing scenario in Gujarat during Q4FY20 (NSR +19% y/y) and softer energy costs. Accordingly, EBITDA/te of SNGI stood at Rs 1,069 – sturdy growth of 65% y/y while absolute EBITDA grew by ~12% to Rs 514 mn. Further, total Net debt/EBITDA of company stood at alarming levels of 6.24x as of Mar’20 vis-à-vis ~3.92x in FY19. Going ahead, post commissioning of Kutch grinding unit, capacity of SNGI will increase by ~50% to 6 MTPA. However, we foresee serious challenges w.r.t ramping up the grinding unit due to heightened competitive intensity and modest demand growth in Gujarat market while volumes would be driven by clinker exports (margin dilutive). Accordingly, we expect utilization levels to remain subdued – at 48% by FY22. In our bull case scenario, despite factoring in volume/EBITDA CAGR of 22.1%/14.1% over FY20-FY22 (base of volume is weak due to two maintenance shutdowns in FY20), we expect net debt/EBITDA to hover at elevated levels of 4.4x by FY22.
Taking an average of EV/EBITDA and DCF derived values, we have a target of Rs 16.2/share (implied EV/EBITDA multiple of 6x on FY22E), and we maintain our SELL rating on the stock. Key risks for SNGI – In a scenario of second wave of COVID/subdued demand scenario in overseas markets of Bangladesh and Sri-Lanka, we believe that scheduled debt repayment of Rs 1.2 bn in FY21E would become a tall task for the company.
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