Buy Sagar Cements; target of Rs 256: YES Securities

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YES Securities' research report on Sagar Cements

Sagar Cements (SGC) reported sequential volume degrowth of 13% (+21% y/y) due to erratic monsoon in Q2FY23. Similarly, NSR corrected sequentially by ~3% q/q (+6% y/y) translated into revenue of Rs4.7bn, declined by 15% q/q (+29% y/y). Total cost/te surged by 8% q/q (+25% y/y) due to elevated power cost/te (+22% q/q & +68% y/y) dented EBITDA/te by 89% q/q (92% y/y) to Rs55. EBITDA de-grew by 91% q/q and y/y both to Rs57mn and reported adj. net loss of Rs423mn due to higher finance cost. In H1FY23, EBITDA/te declined by 69% y/y to Rs300, owing to elevated power cost (Rs1,991/te; +63% y/y) eroded the earning visibility for FY23E. As a result, we have trimmed our EBITDA estimate for FY23E by 60% to Rs1.8bn. With trimmed EBITDA and higher finance cost, we expect SGC to report a net loss of Rs594mn (earlier Net profit of Rs1.5bn) in FY23E. While we have reduced revenue estimates by 9% on account of missing volume guidance of 5MT for FY23E. Newly added capacities in MP & Orissa will allow SGC to lower the southern exposure and grow beyond south markets. Also, higher blended cement dispatches from the East/Central units will improve the overall blending ratio (guided ~60% for FY23E) and will improve the utilization of south clinker units. SGC borrowed Rs5bn for acquiring Andhra Cement bloated the finance cost for the near term, while the acquisition process is expected to finalize by the end of Q3FY23E, if all approvals are received timely. With this acquisition, SGC will be on track to achieve ~10MTPA capacity by FY25E (2x in the last 10 years).

Outlook

Given the lower capex we expect an FCF of Rs2.1bn over FY23-24E, aids to deleverage the B/S. We retain our BUY rating with a TP of Rs256, valuing the stock at 7.5x EV/EBITDA on the FY24E.

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Sagar Cements - 211022 - yes