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1 Result Update Institutional Research November 19, 218 Sanghi Industries Result Update Subdued revenue growth due to sluggish realization despite volumes The company posted a revenue of INR 244cr for the quarter, up by 18.7% as a sharp increase in volumes offset a dip in realization (-8.4% YoY to INR 3938/ton). Total sales volume for the quarter stood at.62mt up by ~3% YoY (from.48mt), driven by the demand growth in its key markets which stood at 1-13%. There a marginal loss in volume due to the reduced availability of coastal shipping to Mumbai in the monsoon season. Cost escalation impacts EBITDA/Ton EBITDA/Ton for the quarter stood at INR 523 down by 47% YoY (from INR 976) and 18% QoQ (from INR 638) due to higher power and fuel costs (up by 31% YoY to INR 1251/ton), as well as raw material costs (up by 14% YoY to INR 24/ton). Fuel costs rose dramatically, due to the unavailability of lignite, leading to a change in the fuel mix. Currency depreciation further increased costs of international coal leading to an overall increase in operating costs to INR 3415/ton (up by 2.7% YoY from INR 3325/ton) Estimated capex is on track The company has completed 25% of civil work and has ordered all the equipment in the ongoing capacity expansion to 8.1mt. The new capacity addition is expected to be commissioned by Q1FY21. Valuations Although the company witnessed a subdued quarter, the company continues to be one of the lowest variable-cost producers in the industry, due to its locational advantage (proximity to good quality marine limestone reserves) as well as captive thermal power plant of 63 MW. We expect the low availability of lignite to be a temporary issue and expect further savings to come from its CPP and WHRS plants. A higher proportion of PPC and slag cement in its sales mix, combined with the increased capacity (leading to a higher pricing power) will further improve the realization. With the government s increased focus on infrastructure development and affordable housing, we expect continued demand in its key markets of Gujarat, Maharashtra, Rajasthan and Kerala. At a CMP of INR 63, the company trades at a EV/EBITDA of 8.3 on FY2 earnings. However, the continued short-term issues prompts us to reduce our target price to INR 86 giving an upside of 37%. (i.e. valuing the stock at FY2E EV/Ton of $8/Ton, 9x FY2E EV/EBITDA) Downside Scenario Industry STRONG BUY Current Price 63 Price Target 86 37% Market Data Upside Scenario Cement Sensex Nifty 1682 Bloomberg Code Eq. Cap. (INR Crores) 251 Face Value (INR) 1 SNGI:IN 52-w H/L 58/144 Market Cap (INR Crores) 163 Valuation Data FY18 FY19E FY2E OPM 21.% 18.5% 19.4% NPM 9.1% 6.5% 7.5% P/E (x) EV/EBITDA (x) EV/Ton ($) Sanghi Industries Vs SENSEX Sanghi Shareholding Pattern * Sensex Sep 18 Jun 18 Sep 17 Promoters FIIs DIIs Retail (INR Crores) 9MFY16 FY17 FY18E FY19E FY2E Net Sales Growth% -17% 28% 3% 6% 1% EBITDA Growth% -4% 31% 9% -6% 15% Reported PAT Growth% -48% 294% 48% 12% 7% EPS (INR) Sales Volume (MT) P/E (x) EV/EBITDA (x) EV/Ton ($) * Read last page for disclaimer & rating rationale research@ www.

2 Sanghi Industries - Result Update Page 2 Result Analysis (INR Crores) Y-o-Y Q-o-Q Net Sales % -11.2% COGS % 27.8% Employee Expenses % -11.8% Power and Fuel % -5.8% Freight and Forwarding % -13.9% Other Expenses % -11.8% Total Expenses % -8.5% EBITDA % -25.3% Depreciation % 1.9% Other Income % -26.% EBIT % -41.9% Finance Cost % 36.3% PBT % -9.1% Taxes % % Net Profit % -9.1% The company s net sales rose 18.7% y-o-y (from INR 26cr in ) but declined 11.2% q-o-q (from INR 275cr in ) to INR 244cr in. EBITDA for the company stood at INR 32cr down from INR 47cr (-31% Y-o-Y) and INR 43cr (-25% Q-o-Q) with EBITDA Margins at 13.3% as against 22.7% in and 15.8% in. The fall in margins was primarily due to higher power and fuel costs, as well as raw material costs. EBITDA/Ton for the quarter stood at INR 523 down from INR 976 (-46.5% Y-o-Y) in and INR 638 (-18% Q-o-Q) in. Total cement volumes for the quarter stood at.62mt. The cement volumes grew by 3% YoY and declined 8.8% QoQ. Reported PAT stood at INR 1.96cr which was down by 82% Y-o-Y (from INR 11cr) and 9% Q-o-Q (from INR 2cr). PAT Margins stood at.8%, down from 5.3% in and 7.2% in. Realization/ Ton has decreased to INR 3938, down from INR 431 (-8.4% Y-o-Y) and INR 442 (-2.6% Q-o-Q). Capacity Utilization stood at 61% for the quarter. (INR/Ton) Y-o-Y Q-o-Q Realization % -2.6% RM Cost % 4.2% Employee Cost % -3.2% Power and Fuel % 3.4% Freight and Forwarding % -5.5% Other Expenditure % -3.2% Total Expenditure %.3% EBITDA % -18.% Key Concall Highlights The clinker production rose by 31% YoYand cement production by 3% YoYfor the quarter. The company recently introduced slag cement and reduced the clinker factor to 35% (39% in and 31% in ). The contribution of sales from the Gujarat market has reduced to 91% vs 93% in. Power and fuel costs were considerably higher for the quarter due to the reduced availability of lignite. As a result, fuel mix for firing the kilns was 1% lignite and 9% coal as compared to 27% lignite and 73% coal in. However, the availability has since been better (GMDC has started providing a higher allocation (25k-3k tons of lignite)), and the management is guiding the fuel mix to go up to 25-3%. International coal prices, which had gone up in have come down now; however currency depreciation still remains a concern. The cost of lignite and coal (per Kcal) for the quarter was at INR and INR 1.15 respectively. There was a 5% loss in volume in Maharashtra on account of limited availability of coastal shipping due to monsoon. Due to introduction of slag cement raw material costs were higher as slag purchases were done leading to a higher substitution of limestone and clinker in the overall blended ratio. This has reduced the production cost overall, which is shown by other expenses reducing research@ www.

3 INR INR % INR Crores % Million Tons.6 % INR Sanghi Industries - Result Update Page 3 17% of the power is sourced from WHRS and the rest through its thermal power plants. On a QoQ basis, the higher interest cost was on account of the capitalization of all past projects over the last 12 months. The capacity expansion project is expected to be commissioned by the end of Q4FY2. 25% of civil work and the ordering of all the major equipment have been completed. The sourcing of fly-ash has been improved as Tata and Adani power plants have improved their generation. The continuity of flyash has been assured through the commissioning of a fly-ash storage silo which keeps stock worth 5 days. The company s blended mix stands at 65% OPC and 35% blended cement. The trade mix stands at 35% trade and 65% non-trade. Last year, the total demand in Gujarat stood at 21.5mt which is projected to grow at 13% this year. The total capacity in Gujarat is ~27mt. The capex for this year is projected to be INR 5-6cr. Sales Volume 5 Realization/Ton % 1% 3% -7% -13% -16% -14% -23% 2% 29% 4% 3% 2% 1% % -1% -2% % Sales Volume % Growth YoY Realization/Ton Margin fell due to higher logistics cost and higher power and fuel cost 7 3% % 22.8% 22.9% 22.7% 22.1% 25% % 17.2% 16.3% 15.8% 13.3% 2% 15% 1% 1 5% % EBITDA EBITDA Margin Increasing cost pressure due to lower availability of lignite and ships EBITDA/Ton % 8% % -39% 8% 6% 18% 27% -34% -46% 6% 4% 2% % -2% -4% -6% Total Expenditure/Ton EBITDA/Ton % Growth YoY research@ www.

4 Sanghi Industries - Result Update Page 4 Profit & Loss (INR Crores) 9MFY16 FY17 FY18 FY19E FY2E Net sales COGS Employee Expenses Power and fuel Transportation cost Other Expenses EBITDA D&A Other income EBIT Interest Expense PBT Tax Effective tax rate.5%.... PAT Exceptional Items Reported PAT Balance Sheet (INR Crores) FY16 FY17 FY18 FY19E FY2E Share Capital Reserves & Surplus , , ,57.7 Shareholder's Funds 1,51. 1,114. 1, , ,758.7 Long-term borrowings Other non-current liabilities Long term provisions Non-current liabilities Short-term borrowings Trade payables Other current liabilities Short-term provisions Current liabilities Total Equity and Liabilities 2,2.4 2,65.6 2, , ,168.3 Gross Block 2,618. 2, ,8.2 3,28.2 3,48.2 Less: Accum. Depreciation 1,57.3 1,13.1 1,22.5 1, ,372.9 Net Fixed Assets 1,56.7 1,619. 1,82.3 1, ,35.3 Deferred Tax Assets Other Non-current Assets Non-current Assets 1, , , , ,978.5 Inventories Trade receivables Cash and cash equivalents Other current assets Current Assets ,12.2 Total Assets 2,2.4 2,65.6 2, , , research@ www.

5 Sanghi Industries - Result Update Page 5 Cash Flow (INR Crores) FY16 FY17 FY18E FY19E FY2E PBT Depreciation & Amortization (Incr)/Decr in Working Capital Cash Flow from Operating (Incr)/ Decr in Gross PP&E Cash Flow from Investing (Decr)/Incr in Debt Finance costs Cash Flow from Financing Incr/(Decr) in Balance Sheet Cash Cash at the Start of the Year Cash at the End of the Year Cash and Bank Balances RATIOS FY16 FY17 FY18E FY19E FY2E Particulars EBITDA/Ton Sales Volume (Mn tons) Growth (%) Total Sales 8.3% -1.6% -4.5% 3.5% 1.2% EBITDA 28.1% -1.7% 8.9% -6.5% 15.2% PAT 232.8% -38.% 47.8% -23.9% 26.5% Profitability (%) EBITDA Margin 19.5% 19.9% 21.% 18.5% 19.4% NPM 9.8% 6.3% 9.1% 6.5% 7.5% RoE (%) 7.3% 5.7% 5.8% 4.3% 5.1% RoCE (%) 5.9% 6.9% 6.8% 5.8% 6.1% Debt Ratios Net Debt/EBITDA Net Debt/Equity Interest Coverage Per share data / Valuation EPS (INR.) BPS (INR.) P/E (x) EV/EBITDA (x) EV/Ton ($) research@ www.

6 OUR RECENT REPORTS Dalmia Bharat Coromandel International Meghmani Organics IndoStar Capital Minda Industries Sharda Cropchem Heidelberg Cements Manappuram Finance IG Petrochemicals Prataap Snacks Aarti Industries Shriram Transport

7 Sanghi Industries - Result Update Page 7 Sanghi Industries Date CMP (INR) Target Price (INR) Recommendation November 19, Strong Buy August 9, Strong Buy Rating Legend Strong Buy More than 15% Buy 5% - 15% Hold 5% Disclaimer: This report has been prepared by Nalanda Securities Pvt. Ltd( NSPL ) and published in accordance with the provisions of Regulation 18 of the Securities and Exchange Board of India (Research Analysts) Regulations, 214, for use by the recipient as information only and is not for circulation or public distribution. NSPL includes subsidiaries, group and associate companies, promoters, directors, employees and affiliates. This report is not to be altered, transmitted, reproduced, copied, redistributed, uploaded, published or made available to others, in any form, in whole or in part, for any purpose without prior written permission from NSPL. 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