Target Price 941 CMP 680 FY19E EV/EBITDA 6.1x. - 1 of 21 - Friday 01 st July, 2016

Transcription

1 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 STOCK POINTER Sagar Cements Ltd. BUY Target Price 941 CMP 680 FY19E EV/EBITDA 6.1x Index Details Sensex 27,144 Nifty 8,328 BSE 100 8,486 Industry Cement Scrip Details Mkt Cap ( cr) 1,184 BVPS ( ) O/s Shares (Cr) 1.7 Av Vol (Lacs) Week H/L 719/305 Div Yield (%) 0.4 FVPS ( ) 10.0 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 FY Shareholding Pattern Shareholders % Promoters Public Total Sagar vs. Sensex Sensex Sagar (RHS) 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. Key Financials ( in Cr) Y/E Mar Net Adj EPS EPS Growth RONW ROCE P/E EV/EBITDA EBITDA Sales PAT (Rs) (%) (%) (%) (x) (x) E E 1, E 1, of 21 - Friday 01 st July, 2016

2 ii) 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. iii) 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 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. - 2 of 21- Friday 01 st July, 2016

3 Company Background Incorporated in 1981, Sagar Cements is a south based cement manufacturer with a cement capacity of 3 mtpa and a clinker capacity of ~ 2.3 mtpa. It earns ~70% of its revenues from sales to south India. The company primarily manufacturers the OPC variety of cement from its plant situated in the Nalgonda district of Telanga and has a dealership strength of ~1600. In FY15, it acquired BMM Cements for Rs 540 crores which has a cement capacity of 1 mtpa and a clinker capacity of 0.7 mtpa. BMM Cements has a 25 MW thermal captive power plant and a 20 year limestone mining lease. In June 2016, Sagar received an approval to acquire a 0.2 mtpa grinding unit of Toshali Cements for Rs 60 crores. It further plans to increase the capacity of this unit to 0.3 mtpa at a cost of Rs 6 crore post acquisitions. Post both these acquisitions, Sagar Cement s consolidated capacity will increase ~4.3 mtpa from 2.75 mtpa in FY16. Sagar Cements Snapshot Sagar Cements (Standalone) FY16 Revenues: Rs 622 crores Capacity Geography Mix Channel Mix Freight Mix Cement:3.0 mtpa Clinker: 2.3 mtpa Capacity Utilization:55% AP & T: 42% Karnataka:10.5% TN: 16.8% Maharashtra: 19% Orrisa: 9% Trade: 75% Non-Trade: 25% Road: 100% - 3 of 21- Friday 01 st July, 2016

4 Key Investment Highlights Well poised to capture demand revival in the South Sagar Cements, with a grinding capacity of 4 mn tones (including 1 mn tones post acquisition of BMM industries) is a dominant player in south India with presence across all five key states AP, Telangana, Tamil Nadu, Kerala and Karnataka. In addition, it has also expanded its geographic wings to Maharashtra and Orrisa. However, it continues to earn nearly~70% of its revenues from the south. Diversifying geographic base, but South continues to dominate 100.0% 90.0% 80.0% 70.0% 4.1% 3.8% 3.9% 6.0% 7.1% 8.7% 9.3% 11.8% 13.5% 16.0% 5.3% 20.0% 19.0% 7.0% 11.8% 13.3% 10.0% 60.0% 13.9% 14.0% 11.0% 16.1% 16.8% 50.0% 40.0% 30.0% 20.0% 70.8% 53.7% 51.0% 54.0% 15.1% 10.5% 38.8% 41.7% 10.0% 0.0% FY11 FY12 FY13 FY14 FY15 FY16 AP & T Karnataka TN Maharashtra Orrisa Others South India 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 revive going forward. - 4 of 21- Friday 01 st July, 2016

5 South Industry: Demand likely to revive after a subdued period of 5 years, utilizations to cross 60% in m n tonnes FY11-FY15: Capacity CAGR: 6.1% Demand CAGR: 0.9% Average utilization level: 59.3% FY16-FY18 Estimated: Capacity CAGR: 1.6% Demand CAGR: 7.9% Average utilization level: 63% 70% 68% 66% 64% 62% 80 60% 60 58% % 54% 52% 0 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E 50% Capacity Dem and Utilization (RHS) Our industry interactions suggest that while there has been an increase in project clearances, on-the ground construction activity is yet to pick-up. Barring roads, which has seen a significant improvement in pace of execution, other infrastructure projects are yet to take-off. Accordingly, we believe that a real-uptick in cement offtake will happen from FY18 onwards, when construction of most projects is likely to be in full swing. Accordingly, we expect cement demand to grow at 6.7% in FY17; this is primarily attributable to the low base (-1.3% in FY16). We expect an 8% CAGR from FY18 onwards. Diversification to faster growing areas a plus The management has strategically reduced its exposure to Andhra Pradesh from ~71% of total revenues in FY11 to ~40% in FY16. It has expanded its presence in the Tamil Nadu and Kerala markets which are relatively faster growing, coupled with an enhanced presence in Maharashtra and Orissa, which are historically lucrative markets owing to favorable demand-supply dynamics. This strategic shift has enabled the company to report a 5% revenue CAGR during FY11-16 (standalone) despite the fact that AP has de-grown at a CAGR of 6% during the same period. - 5 of 21- Friday 01 st July, 2016

6 Re-alignment of markets augurs well for future prospects in mn tonnes Only market to de-grow 0.00 AP & T Karnataka TN Maharashtra Orrisa FY11 FY16 Major infra activity lined up in key markets - 6 of 21- Friday 01 st July, 2016

7 Erro r! Not a valid link. South markets to recover from de-growth Orrisa and Maharashtra to maintain growth pace 15% 20.0% 10% 15.0% 5% 10.0% 0% FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e FY19e 5.0% -5% -10% 0.0% -5.0% FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e FY19e -15% AP & T Karnataka TN -10.0% Maharashtra Orrisa Sagar s plant in Nalgonda, Telangana is within 100 kms of Amravati, the proposed state capital of Andhra Pradesh. Amravati is expected to witness construction activities towards enhancement of road and housing infrastructure. With close proximity to the city, Sagar Cements is expected to emerge as the biggest beneficiary of the development of the new state capital. Acquisition of BMM results in multiple synergies In June 2008, Sagar invested Rs 86 crores in a JV with Vicat SA, France in order to set up a 5.5 mtpa cement plant in Karnataka. In September 2014, Sagar sold its entire 47% stake in the JV for Rs 435 crores, thus multiplying its investment by more than 5x. In August 2015, Sagar completed its acquisition of BMM Cements for Rs 570 crores, funded primarily from the profits booked through the JV. About BMM: Capacity: 1 mn ton Location: Karnataka- Andhra Pradesh Border Capacity Utilization: 45% in FY16 Power: 25 MW Captive Power Plant Limestone: 20 years mining lease granted in of 21- Friday 01 st July, 2016

8 Acquisition of BMM provides multiple synergies for Sagar, as enumerated below: i) Reduction in freight cost: BMM Key Financials in Rs crs FY14 FY15 Volumes ( in mn tonnes) Realisations (Rs/Tonne) Revenues EBITDA PAT Fixed Asset BMM, located at the AP-Karnataka border, is well positioned to service the southern markets of Karnataka, Tamil Nadu and AP, while Sagar s plant in Nalagoda, can focus on supplies to Maharashtra and Orissa. This arrangement has the potential to bring down Sagar s lead distance from kms to kms, a reduction of nearly 20%. Sagar s freight cost which ranges between Rs per tone, is expected to come down to Rs per tone by FY18-19 owing to the anticipated benefits of reduced lead distance post acquisition of BMM. Pre-acquisition distribution model High lead distance as far off markets services Sagar Cements, Mattampally - 8 of 21- Friday 01 st July, 2016

9 Post BMM acquisition Same markets can now be serviced through a shorter lead distance Sagar Cements, Mattampally BMM, Gudipadu Commencement of captive railway siding to further reduce freight cost: Sagar has completed the construction of its captive railway siding, at a cost of Rs 123 crores. Currently, 100% of its cement dispatches are via road in the absence of railway connectivity to its plant. Hence, the railway siding was constructed with the aim of reducing freight cost, enhancing its presence in far away markets at competitive rates. The management has indicated that the trial run of the unit has begun. However, the railway minister is yet to re-classify the freight cost of the railway siding to industrial rates, as a result of which the company has not yet derived significant cost savings. The rates are expected to be revised in FY17, post which, the company is expected to derive savings of ~Rs 12 crores annually, translating to bps expansion in operating margin. ii) Reduction in power cost: Unlike Sagar, BMM has a 25 MW captive coal based power plant. With captive requirements of only 10 MW, BMM has a PPA to sell 15 MW to AP Rs 5.4/unit. Sagar is evaluating the options of continuing its contract with AP Genco - 9 of 21- Friday 01 st July, 2016

10 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 versus increasing captive consumption. Either way, the company stands to benefit either through sale of power which compensates for higher cost power purchased or through the consumption of low cost electricity as captive power consumption will cost ~Rs 4/unit as compared to Rs 6.3/unit in case of purchased electricity. Accordingly, Sagar s power and fuel cost which stands at ~Rs per tone is expected to reduce to ~ Rs 1100 per ton. Sagar s power cost per tone reduced from Rs 1220 per tone in FY15 to Rs 1120 per tone in FY16 owing to: i) Captive consumption in BMM s plant, and ii) Fall in coal prices. Sagar has a PPA with Singareni coal field for the supply of coal. However, Sagar s consumption is skewed towards international coal domestic: international coal mix stood at 25:75. According to the management, the quality of the international coal grade variety is far superior, thereby increasing the price competitiveness of the same when adjusted on gross calorific value basis. Coal prices have nearly havled from ~$130/tone to $60/tone from May 2011 to May 2016 as the emphasis, globally, has shifted to cleaner fuels. Coal prices are expected to remain subdued in $/Ton Australian Coal Price Also, thanks to technology initiatives, the electricity consumption per unit of production has been on a declining trend adding to the savings in power and fuel costs of 21- Friday 01 st July, 2016

11 Erro r! Not a valid link. Declining electricity consumption per unit power cost per tone also declining in KWH FY11 FY12 FY13 FY14 FY15 Electrcity consumption per unit of production in Rs per tonne FY11 FY12 FY13 FY14 FY15 FY16 Power Cost per tonne iii) Reduce tax liability: BMM reported a net loss of Rs 57 crores and Rs 65 crores in FY13 and FY14 respectively. Sagar can use these accumulated losses to lower its tax liability. In FY16, Sagar s tax rate stood at 12% and is expected to remain at 12% in FY17, before increasing to 28% in FY Limestone reserves adequate to support any expansions Around 1.4 tonnes of limestone is required to manufacture 1 tonne of cement. South India has abundant limestone reserves, which is also the reason for surplus cement capacities in that region. Sagar s limestone mine is within 4 kms of its plant. The mine has reserves of more than 1000 mt, which can serve Sagar s requirements for 100+ years. BMM, too, has received a 20 year mining lease in 2016, with reserves of 155 mt. Prior to the grant of the mining lease, the company had to purchase limestone externally thereby incurring high expenditure. Hence, BMM operated at only 16% utilization levels in FY15. Even so, Sagar s (consolidated) raw material expenses shot up from Rs ~400 per tone to Rs 680 per tone in FY16. As the mining lease is now obtained for BMM, we expect raw material costs to reduce to Rs 450 per tone by FY of 21- Friday 01 st July, 2016

12 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Well-thought out expansion strategy We derived great comfort from our interaction with the management. With a handson management approach to the situation on the ground, they have adopted a strategy to double their capacity every 12 years, timing it with the next up-cycle in the cement industry. The cement industry, is inherently, cyclical in nature, with demand growth of ~6% indicting a down-cycle and a demand growth of ~10%, indicating an up-cycle. Cement cycles since 1990 in mn tonnes 300 ~6% CAGR ~6% CAGR ~10% CAGR ~6% CAGR ~10% CAGR 50 0 Sagar completed the acquisition of BMM in 2015, at the start of the potential next up-cycle in the cement sector. This strategy ensures that the company expands and consolidates its capacity during a down-cycle and maximizes the demand potential in an up-cycle, thereby ensuring that equity investors are awarded with high RoEs. Key Risks: Lower than anticipated rainfall: While the Met department has forecast above normal monsoons for this year, any deviation will hurt the rural economy to a great extent. This will adversely impact all underlying sectors, including cement. Increase in coal prices: Sagar is entirely dependent on coal for its fuel requirements. Any increase in coal prices will put pressure on the operating margins of 21- Friday 01 st July, 2016

13 Financial Performance In Q4FY16, Sagar reported revenue de-growth of 15% YoY owing to 5% decline in volumes and 8% decline in realizations. The decline in volume and pricing was on account of subdued demand conditions. Q4FY16 volumes stood at 0.46 mn tones, while net realization stood at Rs 4670 per tone. EBITDA margin contracted 600 bps to 16.8% in Q4FY16 owing to lower realizations, higher employee and operating costs. The company reported a PAT of Rs 15.2 crores, down 30% YoY owing to contraction in operating margin. Quarterly Financial Performance ( in crore) Particulars Q4FY16 Q4FY15 FY15 FY16 Net Sales Growth % % Total Expenditure EBIDTA EBDITA Margin % Depreciation EBIT (EX OI) Other Income EBIT Margin % Interest Exceptional items PBT Margin % Provision for Tax PAT PAT Margin (%) of 21- Friday 01 st July, 2016

14 Erro r! Not a valid link. Financial Outlook Revenues expected to grow at a CAGR of 16% We expect Sagar s revenues to grow at a 3 year CAGR of 16% to Rs 1178 crore in FY19E on the back of a ~12% CAGR in volumes. We expect sales volume to touch 2.8 mn tones and net realization to clock at Rs 4250 per ton by FY19. The steady volume growth will be driven by: i) Pick-up in construction activity in the South ii) Ramp up of production from BMM Cements and iii) Incremental sales volumes from the recently acquired Toshali cements. For a long period, the utilization of players in the South remained at sub 50% levels owing to political disputes. However, with the resolution of the dispute and anticipated pick-up in key markets, led by creation of a new capital state Amravati ( within 100 kms from Sagar s plant), we expect Sagar s utilization level to increase to ~64% by FY19 from 52% in FY16. Utilizations to gradually improve Volumes and realizations to pick up in mtpa % in mtpa 3.0 in Rs per tonn % % FY14 FY15 FY16 FY17E FY18E FY19E 40.0% 30.0% 20.0% 10.0% 0.0% FY14 FY15 FY16 FY17E FY18E FY19E Capacity Capacity Utilisation (RHS) Volumes Net Realisation per tonne - 14 of 21- Friday 01 st July, 2016

15 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Cement prices in Chennai and Bengaluru relatively firm in Rs per bag Hyderabad Bengaluru Bidar Bellary Chennai Sholapur Pune Mumbai Revenues to grow at a 3 year CAGR of 16% Rs crs FY14 FY15 FY16 FY17E FY18E FY19E 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% Revenues % Growth (RHS) - 15 of 21- Friday 01 st July, 2016

16 Erro r! Not a valid lin k. EBITDA and PAT to grow at a steady pace EBITDA is expected to grow at a 3 year CAGR of 23% to Rs 230 crore by FY19 on the back of savings in freight and power costs as the synergies from BMM s acquisition starts to kick in. Accordingly EBITDA margin is expected to expand from ~16.5% in FY16 to ~19.5% by FY19. We expect the company to report a PAT of Rs 111 crores and EPS of Rs 64 in FY19. EBITDA margin set to expand PAT to grow at a robust pace in Rs crs % in Rs crs % % % % % % % % 50 0 FY14 FY15 FY16 FY17E FY18E FY19E 5.0% 0.0% FY14 FY15 FY16 FY17E FY18E FY19E 4.0% 2.0% 0.0% EBITDA EBITDA margin (RHS) PAT PAT margin (RHS) Debt levels comfortable Return ratios to improve in Rs crs % % 50.0% 40.0% % % % % -10.0% FY14 FY15 FY16 FY17E FY18E FY19E 0.0 FY14 FY15 FY16 FY17E FY18E FY19E % D/E Interest Coverage (RHS) RoE RoCE - 16 of 21- Friday 01 st July, 2016

17 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Valuation We initiate coverage on Sagar Cements as a BUY with a Price Objective of 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 estimate of Rs 230 crores. We believe Sagar is a good play in the boom of the cement cycle given its latest acquisitions to enhance capacities and provide synergy benefits in the form of lower freight and power costs, imminent pick-up in cement demand in South and strong balance sheet strength. The assigned valuation implies a EV/Tonne of $64, which is in-line with similar sized peers. Sagar s EV/EBITDA multiple trend EV 7X 8.5X 10X 11.5X 13X - 17 of 21- Friday 01 st July, 2016

18 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun Sagar s Price/Book multiple trend CMP 1X 1.2X 1.4X 1.6X 1.8X Peer comparison on operational parameters Company Capacity FY16 Capcity Utilisation RM per tonne Freight cost per tonne Power & Fuel cost per tonne EBITDA per tonne in mn tonnes FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 Sagar Cements % 52% ,226 1, Sanghi Industries % 83% Mangalam Cements % 71% Deccan Cements % 58% Saurashtra Cements % NA 256 NA 530 NA 1045 NA 599 NA Star Ferro & Cement % 71.1% NA 793 NA of 21- Friday 01 st July, 2016

19 Sagar reasonably priced compared to peers EV/TTM EBITDA Mangalam Cements Sanghi Industries Sagar Cements Star Ferro 5.0 Saurashtra Cements Deccan Cements 0.0 EBITDA/Ton ,000 1,200 1,400 1,600 Peer comparison on financial parameters EBITDA ROE P/E EV/Tonne EV/EBITDA Sales EBITDA PAT PAT Mgn EPS In Rs Cr Mgn (x) ($) (x) Indian Peers Sagar Cements % 51.5% % % 6.1% % E % 5.8% % E % 7.8% % Sanghi Industries % 3.3% % % 0.2% % E % 5.9% % E % 4.5% % Managlam Cements % 2.0% % % -2.5% % E % 5.3% % E % 6.7% % Star Ferro Cements % 5.8% % % 5.4% % E % 6.7% % E % 7.6% % of 21- Friday 01 st July, 2016

20 Financials and Projections Y/E March, Fig in ` Cr FY16 FY17E FY18E FY19E Y/E March, Fig in ` Cr FY16 FY17E FY18E FY19E Profit & Loss Statement Per Share Data (Rs) Net Sales Adj. EPS % Chg Cash EPS Total Expenditure DPS % Chg Book Value EBDITA Capital, Liquidity, Returns Ratio EBDITA Margin % Debt / Equity (x) Other Income Current Ratio (x) PBDIT ROE (%) Depreciation ROCE (%) Interest Dividend Yield (%) Exceptional items Valuation Ratio (x) PBT P/E Tax Provisions P/BV Reported PAT EV/Sales Minority Interest EV/EBIDTA Share of Associate Efficiency Ratio (x) PAT Inventory (days) PAT Margin (%) Debtors (days) Power/ Sales (%) Creditors (days) Balance Sheet Cash Flow Statement Share Capital Profit Before Tax Reserves & Surplus Depreciation Minority Interest Working Capital Changes Long Term Borrowings Others Deferred Tax Liability Operating Cash Flow Other Non Current Liabilities Capital Expenditure Total Liabilities Other Investment Activities Gross Block Cash Flow from Investing Less: Acc. Depreciation Changes in Share Capital Net Block Changes in Borrowings Capital Work in Progress Dividend and Interest Other Non Current Assets Cash Flow from Financing Net Current Assets Net Change in Cash Long term Loans & Advances Opening Cash Balance Total Assets Closing Cash Balance of 21- Friday 01 st July, 2016

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