Sagar Cement. Result Update. Buy. Valuation (x) Estimates (` mn) Q1FY19 Result (` Mn)

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1 Result Update Sagar Cement Buy Better than expected cost rationalization, drives operating performance SGC reported topline growth of 6.2% YoY to ` 2.74bn (2.3% lower than D est). EBITDA at ` 364Mn (-14.2% YoY) was ahead of our estimates of `312Mn, driven by cost rationalization. APAT declined by 41.6% YoY to ` 58Mn. Volume led growth drives Topline, Realization weak SGC reported topline growth of 6.2% YoY (-6.8% QoQ). Cement dispatches at 0.74MnT (+16.2% YoY, -7.1%QoQ). Blended realization at `3,709/ton (-8.6% YoY, +0.4%QoQ). Volume growth during the quarter remained broad-based across the southern states. Management maintained its volume guidance of 3.2MnT for FY19E. Current realization are higher than the exit realization of June month. Cost/ton rationalization improves operating performance Cost/ton stood at Rs3,218/ton (-5.1% YoY, +0.3% QoQ). On the sequential front modest increase in cost/ton attributed to improvement in the P&F & Freight segment coupled with economies of scale resulting in fixed cost/ton reduction. Operating measures helped SGC report EBITDA of `364Mn (-14.2%YoY, - 6.0%QoQ). EBITDA margin at 13.3% (-316bps YoY, +11bps QoQ). EBITDA/ton came in at ` 492/ton (-26.2% YoY, +1.2% QoQ). Other details During the quarter SGC commissioned the grinding unit of Bayyavaram, Post the expansion Bayyavaram grinding unit capacity stands increased to 1.5Mtpa (0.3Mtpa). SGC capacity has increased to 5.5Mtpa post the expansion. Management expects 18MW CPP at Mattampally to be commissioned by Q4FY19E. Views and Valuation SGC s thrust on market and product diversification. Continuous focus on improving P&F cost (WHRS capacity augmented to 8.8MW), 18MW CPP addition at its Mattampally plant (expected to be commissioned by Q4FY19E) coupled with rationalization of lead distance post the grinding unit capacity enhancement at Bayyavaram will go a long way in improving the operating performance in the medium term. At CMP SGC is trading at $55/$53 FY19E/20E EV/T. We maintain BUY rating on the stock with a Target Price of ` 948/share. Q1FY19 Result (` Mn) Particulars Q1FY19 Q1FY18 YoY (%) Q4FY18 QoQ (%) Net Income 2,749 2, ,949 (6.8) Total Expenditure 2,385 2, ,561 (6.9) EBITDA (14.2) 388 (6.0) Depreciation (3.8) EBIT (23.6) 246 (7.3) Other Income 5 23 (76.1) 17 (68.8) Interest (6.6) 154 (8.2) PBT (45.7) 110 (15.7) Tax (51.5) 62 (45.0) RPAT (41.6) APAT (41.6) EPS (`) (41.6) Volume (MnT) (7.1) Realisation/ton 3,709 4,058 (8.6) 3, Cost/ton 3,218 3,392 (5.1) 3, EBITDA/ton (26.2) EBITDA Margin (%) (316) bps bps CMP ` 743 Target / Upside ` 948/28% BSE Sensex 36,496 NSE Nifty 11,010 Scrip Details Equity / FV Market Cap ` 204mn/`10/- `15.2bn USD 0.22bn 52-week High/Low ` 1,161/734 Avg. Volume (no) 4,607 NSE Symbol Bloomberg Code Shareholding Pattern Mar 18(%) SAGCEM SGC IN Promoters 50.0 MF/Banks/FIs 13.8 FIIs 3.6 Public / Others 32.6 Valuation (x) FY18 FY19E FY20E P/E EV/EBITDA ROE ROCE Estimates (` mn) FY18 FY19E FY20E Net Sales 10,381 11,870 13,074 EBITDA 1,513 1,596 1,832 PAT EPS Analyst: Manish Raj Tel: manishr@dolatcapital.com Associate: Bhavik Shah Tel: bhaviks@dolatcapital.com July 23, 2018

2 SGC per ton matrix Particulars Q1FY19 Q1FY18 YoY (%) Q4FY18 QoQ (%) Net Sales per ton 3,709 4,058 (8.6) 3, Cost per ton 3,218 3,392 (5.1) 3, Cost of Material Consumed (6.1) 486 (5.3) Purchase of Stock in trade Change in Inventories Raw Material Cost Employee benefit expenses (4.1) Power and Fuels ,284 (20.6) 1,106 (7.8) Freight and forwarding expenses (1.5) 794 (0.2) Other expenses (20.4) 511 (14.2) EBITDA per ton (26.2) SGC s cost as a % of Net Sales Particulars Q1FY19 Q1FY18 YoY (bps) Q4FY18 QoQ (bps) Cost of Material Consumed (74) Purchase of Stock in trade Change in Inventories Raw Material Cost Employee benefit expenses (24) Power and Fuels (416) 29.9 (245) Freight and forwarding expenses (12) Other expenses (175) 13.8 (200) Segmental Revenue & EBIT Particulars (in Mn) Q1FY19 Q1FY18 YoY (%) Q4FY18 QoQ (%) Segmental Revenue Cement 2,741 2,962 (7.5) 2,940 (6.8) Power (7.0) Segmental Results (EBIT) Cement (24.9) 246 (5.4) Power (5) (12) (58.5) (0) 2,350.0 Plant-wise Utilisation (%) Particulars Q1FY19 Q4FY18 Q3FY18 Q2FY18 Q1FY18 Mattampally Plant Gudipadu Plant (BMM) Logistics mix (%) Particulars Q1FY19 Q4FY18 Q3FY18 Q2FY18 Q1FY18 Rail Road July 23,

3 Coal Cost (Rs) & Coal mix (%) Particulars Q1FY19 Q1FY18 YoY (%) Q4FY18 QoQ (%) Coal Cost (average / ton) Indigenous 5,146 4, , Imported 8,577 6, , Coal Mix (%) Indigenous Imported Key Concall Highlights Key highlights Demand in South (especially AP/Telangana) remained strong, realization improved marginally on QoQ basis. SGC s expansion at Bayyavaram was concluded in June 2018 and the unit s capacity augmented to 1.5MnT (0.3MnT). EBITDA margins for the quarter was impacted due to higher input cost, lower realization and shut down of WHRS plant (from 9th June to 30th June) to enable its upgradation from 6MW to 8.8MW. Volume guidance for FY19E stands at 3.2MnT. The management expects capacity utilization of Bayyavaram plant to be at 70% in FY19E. SAGAR Cement intends to expand its capacity to 10MnT capacity by Current Capacity addition pipeline in South India: Sr. No. Company Name Capacity (MnT) Expected completion 1 Shree Cement in Karnataka 3MnT next 1 or 2 quarters 2 Pennar 3MnT (clinkerisation) next 15-18months 3 Chettinad in AP 3.5MnT (IU) next 9-12months 4 KCP 1.5MnT Q3FY19 or Q4FY19 5 Ramco Cement 1MnT (existing location at Vizag)) and 1MnT (greenfield expansion) Q3FY19 or Q4FY19 In Q1FY19, TN & Kerala markets registered single digit growth rate. However, management volume growth guidance for FY19E remains intact. Region Volume Growth Guidance for FY19E Tamil Nadu & Kerala Degrowth of 5% AP & Telangana +15% Maharashtra +10% Karnataka +5% July 23,

4 Price & Volume commentary Exit price (June) of Hyderabad was at ` 280/bag while current price are at +/- ` 2/bag, Bangalore at ` 295/bag (improvement of ` 5/bag) and Chennai at ` 295/bag (decline of ` 5/bag from June to July). The company caters to only South Odisha markets where realization stands at ` /per bag presently. The management expects realization to remain stable in Q2FY19. However, improvement in prices could be seen from Q3FY19. The trade: non-trade mix for this quarter stands at 65: 35. In Q1FY19, Mattampally Plant operated at 64% utilization and Gudipadu Plant at 80%. Raw Material cost commentary During the quarter, RM cost has gone up by around 5%. Management expects RM cost to moderate going forward. Average slag cost stands at ` 550/ton. The management stated fresh slag prices have increased by ` 250/ton on QoQ basis to ` 650/ton. The old slag: fresh slag mix stands at 60:40 (previous 75:25). The old slag which has been lying with RINL (Vizag Steel plant) is more than 8years old and costs around ` 450/ton. Freight commentary Average freight cost per ton stood at ` 793/ton (` 805/ton in Q1FY18). Despite increase in fuel cost, optimization of lead distance helped SGC report lower freight cost per ton. Increase in capacity utilization of Gudipadu and Bayyavaram plant has led to lower lead distance thereby savings in freight cost. During the quarter, bulk of south volumes have been optimized from Gudipadu plant which was earlier supplied from Mattampally. Average lead distance for the quarter stood at 357kms. Power and Fuel cost commentary Average fuel cost per ton stood at ` 878/ton (` 923/ton in Q1FY18). Despite increase in pet coke& coal prices, stabilization of Gudipadu plant led to lower fuel cost per ton on YoY basis. During the quarter, BMM plant used 100% domestic pet coke and the Mattampally plant used domestic singareni coal majorly. The gap between singareni coal prices and pet coke prices has narrowed down on kcal basis. P&F cost has decreased due to the reduction in fuel cost (and not power). In Q1FY18, average fuel cost of Gudipadu plant stood at ` 1,235/ton which has reduced to ` 852/ton in this quarter. However, average fuel cost of Mattampally plant has increased from ` 812/ton to ` 897/ton. Debt commentary As of Q1FY19, gross debt level on standalone basis was at ` 3.12bn (includes long term debt of ` 1.74bn and working capital of ` 1.38bn). On consol level, gross debt stood at ` 5.50bn (includes long term debt of ` 3.70bn and working capital of ` 1.80bn). July 23,

5 Management expects debt level to stand close to ` 5.5bn in FY19. Capex and upcoming projects commentary Captive Power Plant of 18MW at Mattampally is under progress & is expected to be commissioned by March Till date, the company has spent ` 0.55bn out of total capex of ` 1bn. The company will be shutting down its Gudipadu plant for 40days starting from 28 th July for cooler replacement. However, the management said it will not impact its volume but will provide incremental savings of ` 10-15/ton of clinker. The management had provided maintenance capex of ` 150mn out of which ` 75-80mn has already being spent at BMM and ` 40mn at Mattampally. The management guided capex of ` 500mn which would be spent over the next 9months including CPP investment of ` 450mn. In FY19, the no other investment outlay for Mattampally plant is planned. Other Details Bayyavaram plant will be producing 70-75% PSC cement and rest will be GGBS and SFC or 53S. Currently, the plant is producing 10,000-12,000 tons per month GGBS which could go upto 20,000-24,000 tons per month going forward. The management expects product mix in the Southern markets to be 60: 40 (OPC: PPC) since demand is driven by government orders. Views and Valuation SGC s thrust on market and product diversification. Continuous focus on improving P&F cost (WHRS capacity augmented to 8.8MW), 18MW CPP addition at its Mattampally plant (expected to be commissioned by Q4FY19E) coupled with rationalization of lead distance post the grinding unit capacity enhancement at Bayyavaram will go a long way in improving the operating performance in the medium term. At CMP SGC is trading at $55/$53 FY19E/20E EV/T. We maintain BUY rating on the stock with a Target Price of ` 948/share. July 23,

6 Income Statement (` mn) Particulars Mar17 Mar18 Mar19E Mar20E Net Income 8,138 10,381 11,870 13,074 Total Expenditure 7,035 8,868 10,275 11,242 Raw Materials Consumed 1,045 1,451 1,678 1,894 Employees Cost Power & fuel 2,719 3,314 3,885 4,232 Freight & Forwarding exp 1,511 2,179 2,552 2,746 Other expenses 1,329 1,411 1,555 1,700 EBIDTA 1,104 1,513 1,596 1,832 Depreciation EBIT ,021 1,249 Interest Other Income PBT Tax PAT (39) APAT (39) Balance Sheet (` mn) Particulars Mar17 Mar18 Mar19E Mar20E Sources of Funds Equity Capital Other Reserves 7,426 7,588 7,845 8,276 Net Worth 7,630 7,792 8,049 8,480 Long Term borrowing 3,497 3,297 3,797 3,797 Short Term borrowing 1,369 1,153 1,787 1,704 Loan Funds 4,866 4,450 5,584 5,501 Long-term provisions Net Deferred Tax Liability Other Long-term liabilities Total Capital Employed 13,307 13,237 14,710 15,124 Applications of Funds Gross Block 12,757 13,813 15,663 15,913 Less: Acc. Depreciation 3,139 3,675 4,249 4,832 Net Block 9,618 10,138 11,414 11,081 Capital Work in Progress 553 1, Goodwill Non-Current Investments Other non-current assets Deferred Tax Assets Current Assets, Loans & Advances Inventories 1, ,496 1,648 Sundry Debtors ,398 1,469 Cash & Bank Balance 1, ,604 Other Current Assets sub total 4,078 2,916 4,406 5,355 Less: Current Liabilities & Provisions Other Current Liabilities 526 1,078 1,233 1,358 Trade payable 1,478 1,368 1,946 2,101 Provisions sub total 2,025 2,469 3,205 3,488 Net Current Assets 2, ,201 1,867 Total Assets 13,307 13,237 14,710 15,124 E Estimates Cash Flow (` mn) Particulars Mar17 Mar18 Mar19E Mar20E Profit before tax and EOI (39) Net Interest Exp Depreciation Direct taxes paid (53) (194) (165) (230) Change in Working Capital (58) 499 (399) 2 Other (A) CF from Opt. Activities 1,010 1,891 1,062 1,635 Capex (1,452) (1,757) (1,196) (250) Free Cash Flow (442) 134 (135) 1,385 (Inc.)/ Dec. in Investments Other (55) (318) (98) (79) (B) CF from Inv. Activities (1,506) (2,072) (1,294) (329) Issue of Equity/ Preference 2, Inc./(Dec.) in Debt 497 (416) 1,135 (83) Interest exp net (571) (593) (592) (583) Dividend Paid (Incl. Tax) 0 (37) (37) (37) Other (C) CF from Fin. Activities 2,171 (943) 588 (637) Net Change in Cash 1,675 (1,124) Opening Cash balances 30 1, Closing Cash balances 1, ,604 Important Ratios Particulars Mar17 Mar18 Mar19E Mar20E (A) Measures of Performance (%) EBIDTA Margin EBIT Margin Interest / Sales Gross Profit Margin Tax/PBT APAT Margin (0.5) (B) As Percentage of Net Sales Raw Materials Consumed Employees Cost Manufacturing & other exp (C) Measures of Financial Status Debt / Equity (x) Interest Coverage (x) Average Cost of Debt (%) Debtors Period (days) Closing stock (days) Creditor (days) Inventory Turnover Ratio(x) Fixed Assets Turnover (x) WC Turnover (x) (D) Measures of Investment Adjusted EPS (`) (1.9) CEPS (`) DPS (`) Dividend Payout (%) (78.1) BV / share (`) RoE (%) (0.6) RoCE (%) (0.6) RoACI (%) (0.7) (E) Valuation Ratios CMP (`) P/E (x) (386.7) Market Cap. (` mn) 15,157 15,157 15,157 15,157 MCap/ Sales (x) EV (` mn) 18,318 19,026 19,806 19,054 EV/Sales (x) EV/EBDITA (x) P/BV (x) Dividend Yield (%) E Estimates July 23,

7 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 DART RATING MATRIX Total Return Expectation (12 Months) Buy > 20% Accumulate 10 to 20% Reduce 0 to 10% Sell < 0% Rating and Target Price History Month Rating TP (`) Price (`)* Sep-17 Buy Jan-18 Buy 1, Jan-18 Buy 1,240 1,040 Jun-18 Buy 1, * As on Recommendation Date Sagar Cement Target DART Team Purvag Shah Managing Director purvag@dolatcapital.com Amit Khurana, CFA Head of Equities amit@dolatcapital.com CONTACT DETAILS Equity Sales Designation Direct Lines Dinesh Bajaj VP - Equity Sales dineshb@dolatcapital.com Kartik Sadagopan VP - Equity Sales kartiks@dolatcapital.com Kapil Yadav VP - Equity Sales kapil@dolatcapital.com Kartik Mehta Asia Head Derivatives kartikm@dolatcapital.com Derivatives Strategist Designation Bhavin Mehta VP - Derivatives Strategist bhavinm@dolatcapital.com Equity Trading Designation P. Sridhar VP and Head of Sales Trading sridhar@dolatcapital.com Chandrakant Ware AVP - Equity Sales Trading chandrakant@dolatcapital.com Derivatives Trading Designation Shirish Thakkar AVP - Derivatives shirisht@dolatcapital.com Hardik Mehta Sales Trader hardikm@dolatcapital.com Dolat Capital Market Private Limited. 20, Rajabahadur Mansion, 1st Floor, Ambalal Doshi Marg, Fort, Mumbai

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