Sagar Cements Ltd. Q3FY11 Result Update. Enhancing investment decisions

Transcription

1 Q3FY11 Result Update Enhancing investment decisions

2 Explanation of CRISIL Fundamental and Valuation (CFV) matrix The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP). CRISIL Fundamental Grade Assessment CRISIL Valuation Grade Assessment 5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP) 4/5 Superior fundamentals 4/5 Upside (1-25% from CMP) 3/5 Good fundamentals 3/5 Align (+-1% from CMP) 2/5 Moderate fundamentals 2/5 Downside (- 1-25% from CMP) 1/5 Poor fundamentals 1/5 Strong downside (<-25% from CMP) Analyst Disclosure Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company. Additional Disclosure This report has been sponsored by NSE - Investor Protection Fund Trust (NSEIPFT). Disclaimer: This Exchange-commissioned Report (Report) is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. The Data / Report are subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this Report. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information only of the authorized recipient in India only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person especially outside India or published or copied in whole or in part, for any purpose.

3 Reported profit in Q3FY11 due to improved realisations Fundamental Grade Valuation Grade Industry 2/5 (Moderate fundamentals) 5/5 (CMP has strong upside) Cement Sagar Cements Ltd s (Sagar s) Q3FY11 earnings were better than CRISIL Equities expectations on account of profits from the sale of its investment in Sagar Power and due to higher cement realisations, which we had estimated could drop marginally. Consequently, we raise our earnings estimate for FY11 and FY12. However, given the high oversupply in Andhra Pradesh (AP), we expect the company s EBITDA margins will be lower than the industry s over FY Accordingly, we maintain the fundamental grade of 2/5. Q3FY11 result analysis Sagar s Q3FY11 revenues grew by 25.8% y-o-y (3% q-o-q) with sales volume up 5.6% y-o-y and realisations up 19% y-o-y. The growth can be attributed to reduced exposure to the weakening demand in AP markets. Sagar s dispatches in AP as a percentage of total sales reduced to 7.68% in Q3FY11 from 78.2% in Q3FY1. EBITDA margin improved by 985 bps y-o-y (1,88 bps q-o-q) due to lower fuel cost (efficiency gains reduced average fuel cost per tonne by 4% to Rs 674) and better realisations. Sagar reported net profit of Rs ~31 mn (EPS of Rs 2.1). Cement prices firm up; likely to remain stable The domestic cement industry, especially in southern India, witnessed an artificial price rise due to production cuts while we were expecting prices to go down. In AP, we expect cement prices to firm up in Q4FY11 with the likely pick up in construction activities and the government initiating purchase orders for low-cost housing schemes. Also, after considering 4.5 to 6 mtpa new capacity additions in AP, we expect per bag cement prices to rise by ~ Rs 5.5 in FY12. Earnings estimates revised upwards We have raised our revenue estimate (by 4.9% for FY11 and 5.8% for FY12) owing to better-than-expected realisations. We expect the company to end FY11 with profits of Rs 37 mn as against our earlier expectation of a loss of Rs 125 mn. Similarly, for FY12, we expect a net profit of Rs 131 mn against our earlier expectation of Rs 14 mn. Valuations: Current market price has strong upside We continue to value Sagar on sum-of-the-parts basis using the EV/tonne of Rs 1,72 for the core business and its investments in Sagar-Vicat JV at 6x EV/EBITDA. Based on the FY12 estimates, we maintain our fair value of Rs 22 and our valuation grade of 5/5. However, given that the cement industry is going through a down-cycle due to excess capacity, the stock may continue to trade below its fair value until the industry turns around. KEY FORECAST (Rs mn) FY8 FY9 FY1 FY11E FY12E Operating income 2,235 2,71 4,35 4,73 4,961 EBITDA Adj Net income Adj EPS-Rs Adj EPS growth (%) 1. (49.2) 6.7 (84.1) Dividend yield PE (x) P/BV (x) EV/EBITDA RoCE(%) RoE(%) NM: Not meaningful; CMP: Current Market Price Source: Company, CRISIL Equities estimate February 25, 211 Fair Value Rs 22 CMP Rs 135 CFV MATRIX KEY STOCK STATISTICS NIFTY 5263 NSE SAGCEM Face value (Rs per share) 1 Shares outstanding (mn) 15 Market cap (Rs mn)/(us$ mn) 2,25/45 Enterprise value (Rs mn) /(US$ mn) 4,291/95 52-week range (Rs) (H/L) 214/115 Beta 1.4 Free float (%) 55.8 Avg daily volumes (3-days) 1979 Avg daily value (3-days) (Rs mn).25 SHAREHOLDING PATTERN 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% Excellent Fundamentals Fundamental Grade PERFORMANCE VIS-À-VIS MARKET Returns 1-m 3-m 6-m 12-m Sagar -1% -2% -9% -25% NIFTY -4% -9% -1% 12% ANALYTICAL CONTACT Chetan Majithia (Head) Nivedita C. Joshi Suresh Guruprasad Poor Fundamentals % Strong Downside Valuation Grade 41.2% 41.1% 41.9% 8.% 8.1% 7.3% 6.7% 6.7% 6.7% chetanmajithia@crisil.com njoshi@crisil.com Strong Upside 48.3% 7.5%.% 44.2% 44.2% 44.2% 44.2% Mar-1 Jun-1 Sep-1 Dec-1 Promoter FII DII Others sguruprasad@crisil.com Client servicing desk clientservicing@crisil.com CRISIL EQUITIES 1

4 Q3FY11 Result Summary (Rs mn) Q3FY11 Q2FY11 Q3FY1 q-o-q (%) y-o-y (%) Net sales 1, Consumption of raw materials (22.9) 9.7 Raw material as a % of sales 7% 13% 8% (511) bps (19) bps Power and fuel cost (26.4) 36.2 (increase) / decrease in Stock in Trade 36 (112) 14 n.m. (74.4) Purchase of traded goods Other expenses Employees cost EBITDA 141 (48) 24 n.m EBITDA margin 12.5% -5.6% 2.7% 1,88 bps 985 bps Depreciation (6.4) (6.3) EBIT 75 (119) (47) n.m. n.m. Interest and finance charges Operating PBT (8) (189) (119) n.m. n.m. Other income (57.9) PBT 35 (87) (16) n.m. n.m. Tax 4 (34) (41) n.m. n.m. PAT 31 (53) (65) n.m. n.m. Adj PAT 31 (53) (65) n.m. n.m. Adj PAT margin 2.8% -6.1% -7.3% 888 bps 1,6 bps No of equity shares (mn) Adj EPS (Rs) 1.8 (3.) (3.8) - - Source: Company, CRISIL Equities Revenues up 26% y-o-y primarily due to 19% growth in realisations EBITDA margins up 985bps due to better realisations and efficiency gains Good show at operating level flowed down to bottomline; reported profit at net level Revenues up by 3% q-o-q in 3QFY11 Growth in realisations exceeds volume expansion (Rs mn) 1,4 1,2 1, (Rs) 4,5 4, 3,5 3, (mn tonnes) , ,236 1, ,126 2, 1,5 1, 2,913 3,82 3,251 2,822 3, Q3FY1 Q4FY1 Q1FY11 Q2FY11 Q3FY11 Source: Company, CRISIL Equities Q3FY1 Q4FY1 Q1FY11 Q2FY11 Q3FY11 Revenue per tonne Sales volumes (RHS) Source: Company, CRISIL Equities. Hyderabad s per bag cement price remained firm and expanded Sagar s margins (Rs mn) % 12.5% 1 1.% 8.2% 9.8% % 2.7% 4 2.% -5.%.2%.4% -5.6% 2.8% - Jan-9 Mar-9 May-9 Jul-9 Sep-9 Nov-9 Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 Jan-11-1.% -6.1% -7.3% Q3FY1 Q4FY1 Q1FY11 Q2FY11 Q3FY11 EBITDA margin Net margin -Indexed to 1 Source: Company, CRISIL Equities Source: Company, CRISIL Equities CRISIL EQUITIES 2

5 Share price movement Fair value movement since initiation 25 (Rs) 225 (') Jan-9 Mar-9 May-9 Jul-9 Sep-9 Nov-9 Jan-1 Mar-1 Apr-1 Jun-1 Aug-1 Oct-1 Dec-1 Feb-11 2-Nov-1 9-Nov-1 16-Nov-1 23-Nov-1 3-Nov-1 7-Dec-1 14-Dec-1 21-Dec-1 28-Dec-1 4-Jan Jan Jan Jan-11 1-Feb-11 8-Feb Feb Feb-11 -Indexed to 1 Sagar Cements Source: NSE, CRISIL Equities NIFTY Traded Traded Quantity (RHS) CRISIL Fair Value Sagar Source: NSE, CRISIL Equities CRISIL EQUITIES 3

6 KEY DEVELOPMENTS VICAT JV - expansion on schedule: Almost 2% of the concrete floor to set up the plant has been completed ahead of schedule and is on track to be completed by June 212, says management. Amareshwari Cement merger: As expected, the merger with Amareswhwari is set to be completed by the end of Q1FY12, i.e. three months from the EGM scheduled on March 7, 211. Divestment of stake in Sagar Power: Sagar divested 8% stake in Sagar Power to realise other income of Rs 38 mn, which we have factored in. Currently, Sagar Cement holds 7.88% (427,83 shares) stake in Sagar Power, which it expects to divest in Q4FY11 so we have also accounted for ~Rs 38 mn other income to accrue in Q4FY11 too. EARNINGS ESTIMATES REVISED UPWARDS FY11E FY12E Particulars Unit Old New % change Old New % change Revenues (Rs mn) 4,484 4,73 4.9% 4,69 4, % EBITDA (Rs mn) % % EBITDA margin % bps bps PAT (Rs mn) n.m % PAT margin % (2.8).8 358bps bps EPS Rs (7.2) 2.1 n.m % Source: CRISIL Equities Reasons for changes in estimates Line item FY11 FY12 Revenues Raised owing to improved realisations Cement prices are expected to remain firm (we are factoring in the increase in realisations) EBITDA margin Increase in realisations with no change in costs Benefit of firm realisations to be partially offset boosts margins at the operating level by increase in coal prices. We expect rising coal prices to impact margins by 17 bps PAT margins Higher other income on account of divestment of Increase in interest payments with increase in stake in subsidiary, Sagar Power, boosts margins working capital requirements offsets benefit from higher realisations CRISIL EQUITIES 4

7 VALUATION We continue to value Sagar on sum-of-the-parts basis using the EV/tonne of Rs 1,72 for the core business and its investments in Sagar-Vicat JV at 6x EV/EBITDA. Based on the FY12 estimates, we maintain our value of Rs 22 and our valuation grade of 5/5. However, given that the cement industry is going through a down-cycle due to excess capacity, the stock may continue to trade below its fair value until the industry turns around. Sagar-VICAT pro forma profit and loss account (FY14) Capacity 2.75 Utilisation 9% Production 2.48 Sales price/ton (Rs) 4,4 Sales per bag (Rs) 22 Fair value estimate of Rs 22 based on EV/EBITDA; core business valued at Rs143/share and Vicat JV at Rs59/share Gross sales 1,89 Net Sales 8,494 EBITDA margin 27.5% EBITDA 2,336 Assigned EV/EBITDA multiple 6. EV 14,15 Less:debt 11, Equity Value 3,15 Cost of Equity 18% Discounting Years 2. Present value of equity valuation 2,166 Sagar's stake 47% Sagar share of Equity valuation 1,18 Number of shares 17.4 Rs/share 58.5 For Sagar-Vicat JV, we have factored in 9% capacity utilisation and realisation of Rs 22 per bag for FY14, as against CRISIL Research FY12 estimates of Rs 235/bag in the west and Rs 242/bag in the south in FY12, likely end markets of the JV. We have assumed EBITDA margins at 27.5%, marginally higher than the 26.3% achieved by Sagar during FY7-9, as the JV has an integrated power plant. Based on relatively conservative assumptions, we arrive at the present value of Sagar s share in the JV at Rs1,18 mn, as against the equity investment of Rs 88 mn. CRISIL EQUITIES 5

8 One-year forward P/E band (Rs) Mar-7 Jul-7 Oct-7 Jan-8 May-8 Aug-8 Nov-8 Mar-9 Jun-9 Sep-9 Jan-1 Apr-1 Jul-1 Nov-1 Feb-11 Sagar Cements 8x 12x 16x 18x 24x Source: NSE, CRISIL Equities One-year forward EV/tonne band (Rs) 1, 8, 6, 4, 2, May-6 Aug-6 Nov-6 Feb-7 May-7 Aug-7 Nov-7 Feb-8 May-8 Aug-8 Nov-8 Feb-9 May-9 Aug-9 Nov-9 Feb-1 May-1 Aug-1 Nov-1 Feb-11 Sagar EV Rs.15/tonne Rs.2/tonne Rs.3/tonne Rs.4/tonne Source: NSE, CRISIL Equities One-year forward EV/EBITDA band P/E movement (Rs mn) 1, 9, 8, 7, 6, 5, 4, 3, 2, 1, std dev -1 std dev Mar-7 Jul-7 Oct-7 Jan-8 May-8 Aug-8 Nov-8 Mar-9 Jun-9 Sep-9 Jan-1 Apr-1 Jul-1 Nov-1 Feb-11 Mar-7 Jul-7 Oct-7 Jan-8 May-8 Aug-8 Nov-8 Mar-9 Jun-9 Sep-9 Jan-1 Apr-1 Jul-1 Nov-1 Feb-11 Sagar Cements 4x 6x 8x 1x Source: NSE, CRISIL Equities 1yr Fwd PE (x) Source: NSE, CRISIL Equities. Median PE CRISIL IER reports released on Sagar Cements Ltd Date Nature of report Fundamental grade Fair value Valuation grade CMP (on the date of report) 1-Dec-1 Initiating coverage* 2/5 Rs 22 5/5 Rs Feb-11 Q3FY11 result update 2/5 Rs 22 5/5 Rs 135 * For detailed initiating coverage report please visit: CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters. CRISIL EQUITIES 6

9 FINANCIALS Income statement - Sagar Cements Balance Sheet - Sagar cements (Rs mn) FY8 FY9 FY1 FY11E FY12E (Rs mn) FY8 FY9 FY1 FY11E FY12E Operating income 2,235 2,71 4,35 4,73 4,961 Liabilities EBITDA Equity share capital EBITDA margin 28.8% 24.2% 21.% 11.9% 16.2% Reserves 1,29 1,888 2,38 2,4 2,121 Depreciation Minorities EBIT Net worth 1,162 2,38 2,188 2,214 2,295 Interest Convertible debt Operating PBT (28) 171 Other debt 2,79 2,51 2,296 2,56 2,96 Other income (4) Total debt 2,89 2,52 2,36 2,57 2,97 Exceptional inc/(exp) Deferred tax liability (net) PBT Total liabilities 3,325 4,717 4,765 5,55 5,535 Tax provision Assets Minority interest Net fixed assets 1,99 3,822 3,782 3,655 3,452 PAT (Reported) Capital WIP 2, Less: Exceptionals Total fixed assets 3,161 4,5 3,885 3,678 3,475 Adjusted PAT Investments Current assets Ratios Inventory FY8 FY9 FY1 FY11E FY12E Sundry debtors Growth Loans and advances Operating income (%) 6.1 (42.9) 6.7 (81.6) Cash & bank balance EBITDA (%) (38.4) 44.4 Marketable securities Adj PAT (%) 6.1 (42.9) 6.7 (81.6) Total current assets 537 1,261 1,33 1,923 2,123 Adj EPS (%) 1. (49.2) 6.7 (84.1) Total current liabilities Net current assets ,179 Profitability Intangibles/Misc. expenditure EBITDA margin (%) Total assets 3,325 4,717 4,765 5,55 5,535 Adj PAT Margin (%) RoE (%) Cash flow RoCE (%) (Rs mn) FY8 FY9 FY1 FY11E FY12E RoIC (%) Pre-tax profit Total tax paid (178) (13) (7) (19) (65) Valuations Depreciation Price-earnings (x) Working capital changes 1 (354) (21) (24) (61) Price-book (x) Net cash from operations EV/EBITDA (x) Cash from investments EV/Sales (x) C apital expenditure (2,37) (1,5) (167) (75) (1) Dividend payout ratio (%) Investments and others () (15) (231) - (5) Dividend yield (%) Net cash from investments (2,37) (1,2) (398) (75) (6) Cash from financing B/S ratios Equity raised/(repaid) Inventory days Debt raised/(repaid) 1, (214) Creditors days Dividend (incl. tax) (52) (68) (55) (51) (51) Debtor days Others (incl extraordinaries) (562) Working capital days Net cash from financing 1,785 1,117 (265) Gross asset turnover (x) Change in cash position (91) 44 (84) Net asset turnover (x) Closing cash Sales/operating assets (x) Current ratio (x) Quarterly financials Debt-equity (x) (Rs mn) Q3FY1 Q4FY1 Q1FY11 Q2FY11 Q3FY11 Net debt/equity (x) Net Sales 895 1,236 1, ,126 Interest coverage C hange (q-o-q) -3.1% 38.% 5.6% -33.7% 3.3% EBITDA (48) 141 Per share C hange (q-o-q) -92% 324% 26% -138% -393% FY8 FY9 FY1 FY11E FY12E EBITDA margin 2.7% 8.2% 9.8% -5.6% 12.5% Adj EPS (Rs) PAT (65) 3 5 (53) 31 CEPS Adj PAT (65) 3 5 (53) 31 Book value C hange (q-o-q) n.m. 77.8% 22.5% % -79.5% Dividend (Rs) Adj PAT margin -7.3%.2%.4% -6.1% 2.8% Actual o/s shares (mn) Adj EPS (4.4).2.4 (3.5) 2.1 Note: All ratios are computed on Adj PAT Source: Company, CRISIL Equities estimate CRISIL EQUITIES 7

10 CRISIL Independent Equity Research Team Mukesh Agarwal Director +91 (22) Tarun Bhatia Director, Capital Markets +91 (22) Chetan Majithia Head, Equities +91 (22) Sudhir Nair Head, Equities +91 (22) Nagarajan Narasimhan Director, Research +91 (22) Ajay D'Souza Head, Research +91 (22) Aparna Joshi Head, Research +91 (22) Manoj Mohta Head, Research +91 (22) Sridhar C Head, Research +91 (22) sridharc@crisil.com CRISIL s Equity Offerings The Equity Group at CRISIL Research provides a wide range of services including: Independent Equity Research IPO Grading White Labelled Research Valuation on companies for use of Institutional Investors, Asset Managers, Corporate Other Services by the Research group include CRISINFAC Industry research on over 6 industries and Economic Analysis Customised Research on Market sizing, Demand modelling and Entry strategies Customised research content for Information Memorandum and Offer documents

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