BSE ID : 502090 NSE ID : SAGCEM
RECOMMENDED PRICE 680.95
PEAK FROM RECO 1161.40 70.56%
CURRENT PRICE 800.00 17.48%
Sagar Cements is a cement manufacturer with a dominant presence in South India. We initiate coverage on Sagar Cements as a BUY with a Price Objective of Rs 941, representing a potential upside of 38% over a period of 18 months.
Sagar Cements Ltd. (Sagar) is a cement manufacturer with a dominant presence in South India. We believe that the cement industry is on an up-turn and expect Sagar to be a key beneficiary.
We are positive on the company given that:
i) The cement industry is on the verge of a turn-around: South India (which accounts for ~ 70% of Sagar’s revenues) has witnessed a five year lull in cement demand owing to surplus capacities, subdued demand and political unrest over the creation of a separate state, Telangana. However, with the political resolution of Telangana, limited planned capacity additions in the area and an anticipated pick-up in construction and irrigation projects, cement demand in the South is expected to see a revival going forward. We expect key markets of AP, Karnataka and TN to clock 8% CAGR during FY18-19.
ii) Sagar has recently completed the acquisition of BMM cements which has a grinding capacity 1 mtpa for Rs 540 crores. It has also received the approval to acquire a 0.2 mtpa grinding unit of Toshali Industries for Rs 60 crores. Post these acquisitions, the grinding capacity of the company will increase to ~4.3 mtpa from 2.75 mtpa. Inorganic growth at the start of the potential cement up-cycle will help the company fully capitalize on the demand potential. Accordingly, we expect revenues to grow at a 3 year CAGR of 16% to Rs 1178 crore by FY19.
iii) Freight cost as a % of total revenues is expected to decline from 16% in FY16 to ~13% in FY19 owing to: a) BMM Cements is strategically located such that it can service the Southern markets, while Sagar’s standalone plant can focus on supplies to Maharashtra and Orissa. This arrangement has the potential to reduce the lead distance by ~20% and b) Commencement of the railway siding unit is expected to help the company save ~ Rs 12 crore annually.
iv) Power cost is expected to decline given that: a) BMM has a 25 MW captive power plant with a surplus of 15 MW which is sold to AP Genco b) Coal prices are declining due to increasing emphasis on cleaner fuels.
v) With the uptick in demand coupled with lower freight and power costs, we expect Sagar’s EBITDA margin to expand from 16.5% in FY16 to 19.5% by FY19.
We initiate coverage on Sagar as a BUY with a Price Objective of Rs 941, representing a potential upside of 38% over a period of 18 months. We have arrived at our target price by assigning an EV/EBITDA multiple of 8x to FY19E EBITDA of Rs 230 crores.
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