Buy Sagar Cement; target of Rs 650: ICICI Direct

ICICI Direct's research report on Sagar Cement

Sagar Cements reported a robust performance with EBITDA, PAT growth of 10%, 22%, respectively, in a challenging Q1FY21. The results were ahead of our estimates mainly on account of a sharp increase in cement prices in AP, Telangana aided by lower fuel prices during the quarter. Revenues fell 23.3% YoY to Rs 264.1 crore (broadly in line with our estimated revenue of ~Rs 271 crore. Sharp fall in sales volume (down 32.5% YoY to 0.55 MT was largely offset by a sharp rise in cement prices (up 13.8% YoY, 31.6% QoQ to Rs4775/t) in AP, Telangana region. The company outperformed our expectations on the margins, profitability front, reporting EBITDA margins of 32.9% (up 1010 bps YoY) for the quarter, which is highest ever margins reported so far during the quarter by any cement company. Drop in petcoke prices also helped it to reduce power & fuel cost by 24% YoY to Rs 805/t. Capacity utilisation for the quarter was at 37%. With gradual unlocking of economic activities, we expect utilisation to improve, going forward.

Outlook

While the full benefit of new capacities would start flowing in from FY23, we expect expansion led revenue CAGR of 14.2% in FY20-22E. On the valuation front, the company is available at an FY20 EV/t of $51, implying a considerable margin of safety to the replacement cost of $100-110. Further, with strong management profile, cost efficiency and healthy BS, we maintain BUY rating with a revised target price of Rs 650 (i.e. at 7x FY22E EV/EBITDA).

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