Sagar Cements Limited

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1 Sagar Cements Limited BUY CMP: Rs Date: 12 Jan,2010. Key Ratios: Particulars FY08 A FY09 A FY10E FY11E OPM(%) NPM(%) ROE(%) ROCE(%) P/BV(x) P/E(x) EV/EBDITA(x) Debt Equity(x) Key Data: Sector Cement Face Value wk. High/Low (Rs.) / Volume (2 wk. Avg.) BSE Code Target Price:Rs Market Cap: Rs mn. SYNOPSIS We initiated the coverage of Sagar Cements Ltd and set a target price of Rs.231. for medium to long term gains. Sagar Cements Limited is one of the most modern mini cement plants in the state of Andhra Pradesh. The most sophisticated state-of-the-art technology it uses is one of the strengths of the company. The company has recently enhanced its clinker capacity to 2.1 million TPA and its cement capacity to 2.5 million TPA. It manufactures several of cement and all its products are sold under brand name of Sagar. The revenue of the company for the quarter ended on Sept 30 th increased 264.4% YoY V.S.R. Sastry Vice President Equity Research Desk vsrsastry@firstcallindiaequity.com The topline of the company are expected to grow at a CAGR of 43% over 2008A to 2011E. Share Holding Pattern: Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com

2 Table of Content Investment Highlights... 3 Peer Group Comparison... 5 Financials... 7 Charts... 9 Outlook and Conclusion Industry Overview... 11

3 Investment Highlights Results Updates (Q2 FY10) The bottomline of the company for the quarter stood at yoy that is Rs mn from Rs.(29.10)mn of same period of last year. Total revenue for the second quarter stood at Rs mn from Rs which is 264.4% increased than that of a year ago period. EPS for the quarter stood at Rs.7.48 per equity share of Rs each. Expenditure of the company increased 196% YoY to Rs mn from Rs mn of same period of last year. Interest expenses for the quarter stood at Rs.73.72mn. OPM & NPM for the quarter stood at 25% and 9% respectively. Quarterly Results - Standalone (Rs in mn) As at Sep - 09 Sep - 08 Net Sales Net Profit (29.10) Basic EPS 7.48 (1.94) Equity Capital

4 In the quarter, realization levels witnessed a drop. However, in the last month of the quarter Realizations were starting to look better but the recent floods in AP and neighboring state have Played spoil, as a result of which it is taking longer for the environment to stabilize. Andhra Pradesh Plant During the quarter, the Mattampally plant operated at high utilization levels producing 429,570 tons of clinker and 288,060 tons of cement. The volume of cement production in Q2 FY2010 increase by about 25 percent when compare to the preceding last quarter and over six folds when compared to the corresponding quarter last year. As a continuous drive towards improving its share in new/outside AP markets, the company was able to sell 17% of its total dispatches in the quarter to various markets

5 outside the home state,of which about 46% were to the state of Maharastra that translates to 8% of total dispatches. Markets Quantity (in tons) Andhra Pradesh Maharashtra Karnataka Orissa 5617 Tamilnadu 5280 Others 5118 Karnataka Plant The plan to set up a 5.5million ton capacity manufacturing facility in Gulbarga, Karnataka through a JV with the Vicat Group is progressing as planned. The required licenses to implement the project have been obtained and the placement of orders for core equipment will be completed by end of the third quarter of fiscal. The JV has acquired 2000 acres of land including land for the plant as well as mining leases in Karnataka. Of the estimated project cost of Rs 25 billion, the JV company has invested around Rs 700 millions towards land acquisition and other necessary/obligatory sanctions. The facility will have a 5.5 million ton cement grinding unit and a 4 million ton clinkerization unit. It would also have a 60mw power plant for captive use. At a 4 million ton per anum cement capacity the company also has sufficient limestone reserves at its disposal. Company Profile Sagar Cements Limited was incorporated in the year 1981 with the object, inter-alia, of manufacturing of cement. The actual commercial journey started on January 26, 1985 with the production capacity of 66,000 tonnes of OPC per annum at Mattampally, Nalgonda Hyderabad.

6 Sagar Cements Limited, is one of the most modern mini cement plants in the state of Andhra Pradesh. The most sophisticated state-of-the-art technology it uses is one of the strengths of the company. The plant is based on Dry Process Rotary Kiln Technology that is used in Standard Quality' cement companies. As its contribution to the fast developing modern India, Sagar Group, Sagar Cements has been playing the major role since 20 years by providing the cement that speaks for itself. First Mini Plant: The first mini plant of the company is located at Mattampally, Nalgonda district, located within 35 km from the National Highway No 9 connecting Vijayawada- Hyderabad. Subsidiary Company o Sagar Power Limited Products Product range of the company includes: Cements of OPC: 53 grade, OPC: 43 grade, SRC, IRS T-40 Super grade, Portland Pozzolona Cement and Portland Slag Cement. Peer Group Comparison Name of the company CMP (As on 12 Jan, 2010) Market Cap. (Rs. Mn.) EPS (Rs.) P/E (x) P/BV (x) Dividend(%) Sagar Cements Limited Madras Cements

7 Deccan Cements Limited Binani Limited Cement Key Concerns Any change in the existing policies of Government of India and/or State Governments or new policies, providing or withdrawing support to the industries in which the company operates or otherwise affecting these industries, would adversely affect the supply and demand balance and competition in markets in which the company operate there by impacting the margins of the company. The Company's exposure to currency risk arises out of the import of materials like coal for its cement plants and machinery and equipment for its projects. Financials 12 Months Ended Profit & Loss Account (Standalone) Particulars FY 08 A FY 09 A FY 10 E FY11 E (Rs.Mn) 12m 12m 12m 12m Net Sales 2, , Other Income Total Income 2, , Expenditure -1, , Operating Profit Interest

8 Gross Profit Depreciation Profit before Tax Tax Net Profit Equity Capital Reserves , , , EPS Quarterly Ended Profit & Loss Account (Standalone) Particulars Mar 09 A June 09 A Sep 09 A Dec 09 E (Rs.Mn) 3m 3m 3m 3m Net Sales 1, , , Other Income Total Income 1, , , Expenditure , Operating Profit Interest Gross Profit Depreciation

9 Profit before Tax Tax Net Profit Equity Capital EPS *A=Actual, E=Estimated Charts

10 Comparative Graph SAGAR CEMENTS LT BSE SENSEX

11 Outlook and Conclusion At the current market price of Rs , the stock trades at a P/E of 6.42x and 5.56x for FY10E and FY11E respectively. On the basis of EV/EBDITA, the stock trades at 2.52x and 2.24x for FY10E and FY11E respectively. Price to Book Value of the stock is expected to be at 1.26 and 1.03 respectively for FY10E and FY11E. EPS of the company for the earnings of FY10E and FY11E are expected to be at Rs and Rs respectively. The Net sales of the company are expected to grow at a CAGR of 43% over 2008 to 2011E. The plan to set up a 5.5million ton capacity manufacturing facility in Gulbarga, Karnataka through a JV with the Vicat Group is progressing as planned. The facility will have a 5.5 million ton cement grinding unit and a 4 million ton clinkerization unit. We expect that the company will keep its growth story in the coming quarters also. We recommend BUY in this particular scrip with a target price of Rs for Medium to Long Term Gains. Industry Overview India is the world's second largest producer of cement after China, with cement companies adding nearly 11 million tonnes (MT) capacity during April-September 2009, taking the total installed capacity to around 231 MT by September With the boost given by the government to various infrastructure projects, road networks and housing facilities, growth in the cement consumption is anticipated in the coming years. According to Jyotiraditya Scindia, Minister of State, Ministry of Commerce and Industry, cement production could rise to MT in FY11 and touch MT in FY12. With almost total capacity utilisation levels in the industry, cement despatches have maintained a 10 per cent growth rate. Total despatches grew to 170 MT during as against 155 MT in

12 Moreover, cement despatches were MT in October 2009, showing a growth of 9 per cent as compared to MT in October During October 2009, cement production was MT, registering a growth of 6.54 per cent as compared to MT in October Between April to October 2009, cement production totaled MT while cement despatches totaled MT. A few of the leading manufacturers are UltraTech/Grasim combine, Dalmia Cements, India Cements, Holcim etc. Technological change Continuous technological upgrading and assimilation of latest technology has been going on in the cement industry. Presently, 93 per cent of the total capacity in the industry is based on modern and environment-friendly dry process technology and only 7 per cent of the capacity is based on old wet and semi-dry process technology. There is tremendous scope for waste heat recovery in cement plants and thereby reduction in emission level. New Investments Dalmia Cement, South India s second largest cement maker, will invest over US$ million to add 10 MT capacity over the next 2-3 years. India Cements Ltd will invest US$ 104 billion to set up two thermal power plants in the southern states of Tamil Nadu and Andhra Pradesh. Anil Ambani Group company Reliance Infrastructure will invest US$ 2.1 billion to set up cement plants with a total capacity of 20 MT per annum over the next five years. Reliance Cementation, an Anil Dhirubhai Ambani Group (ADAG) company, plans to set up a 5 MT integrated cement plant in Yavatmal district of Maharashtra at a cost of US$ million. Jaiprakash Associates Ltd has inked a MoU with state-owned Assam Mineral Development Corporation Limited (AMDC) for setting up a 2 MT per annum capacity cement plant at an estimated cost of US$ million. Iron ore mining firm Rungta Mines (RML), the flagship company of SR Rungta group, plans to set up a one million tonne cement plant in Orissa with an investment of around US$ 123 million. Mergers and Acquistions (M&As) Holcim strengthened its position in India by increasing its holding in Ambuja Cement from 22 per cent to 56 per cent through various open market transactions with an open offer for a total investment of US$ 1.8 billion. Moreover, it also increased its stake in ACC Cement with US$ 486 million, being the single largest acquirer in the cement sector. UltraTech Cement, a unit of conglomerate Aditya Birla Group, is absorbing sister unit Samruddhi Cement, to form India's biggest cement firm.

13 Leading foreign funds like Fidelity, ABN Amro, HSBC, Nomura Asset Management Fund and Emerging Market Fund have together bought around 7.5 per cent in India's thirdlargest cement firm, India Cements (ICL), for US$ million. Cimpor, the Portugese cement maker, paid US$ million for Grasim Industries' per cent stake in Shree Digvijay Cement. CRH Plc, the world's second biggest maker and distributor of building materials, acquired a 50 per cent stake in My Home Industries Ltd for almost US$ million. Vicat SA, a French cement maker acquired a 6.67 per cent stake in Hyderabad-based Sagar Cement for US$ million. Government Initiatives Government initiatives in the infrastructure sector, coupled with the housing sector boom and urban development, continue being the main drivers of growth for the Indian cement industry. Increased infrastructure spending has been a key focus area over the last five years indicating good times ahead for cement manufacturers. The government has increased budgetary allocation for roads under National Highways Development Project (NHDP). Appointing a coal regulator is looked upon as a positive move as it will facilitate timely and proper allocation of coal (a key raw material) blocks to the core sectors, cement being one of them. Keeping in mind the global meltdown which is impacting the cement companies in India, the government re-imposed the counter-veiling duty (CVD) and special CVD on imported cement in January. This is likely to provide a level playing field to domestic companies. Road Ahead According to a report by the ICRA Industry Monitor, the installed capacity is expected to increase to 241 MTPA by FY 2010-end. India's cement industry is likely to record an annual growth of 10 per cent in the coming years with higher domestic demand resulting in increased capacity utilisation. Moreover, according to the Centre for Monitoring Indian Economy (CMIE), cement production is expected to grow by 8.1 per cent and demand for the same is likely to rise by a healthy per cent in FY

14 Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but we do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.

15 Firstcall India Equity Research: B. Harikrishna Banking & Financial Services B. Prathap IT C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods; Real & Infra D.Asha Kiran Kumar Auto E. Swethalatha Oil & Gas A.Rajesh FMCG Rachna Twari Diversified Kavita Singh Diversified Nimesh Gada Diversified Priya Shetty Diversified Tarang Pawar Diversified Neelam Dubey Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO s, QIP s, F.P.O s,takeoveroffers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications,Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & DebtSyndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions(domestic and cross-border), divestitures, spin-offs, valuation of business, corporate restructuring-capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and other international stock exchanges. For Further Details Contact: 3rd Floor,Sankalp,The Bureau,Dr.R.C.Marg,Chembur,Mumbai Tel. : / / Telefax : info@firstcallindiaequity.com

ACC LIMITED (ASSOCIATED CEMENT COMPANIES)

ACC LIMITED (ASSOCIATED CEMENT COMPANIES) BUY CMP: Rs.730.10 Date: 18 Nov,2009 Key Ratios: Particulars CY07 A CY08A CY09E CY10E OPM(%) 29 25 33 32 NPM(%) 20 14 20 19 ROE(%) 34 23 26 22 ROCE(%) 38 31 36