Spotlight The Idea Junction

Transcription

1 Spotlight The Idea Junction Well placed to capture growth in AP/Telangana Cost efficiencies and scaling of capacity to drive profits Sagar Cements (SGC) is a Hyderabad-based cement company, primarily operating in the southern market of India (~78% of overall volumes). The company s key markets are AP/Telangana (~46% of volumes), Tamil Nadu (~16%) and Karnataka (~16%). To diversify geographically, SGC is likely to increase its capacity from 4.3mt currently to ~5.8mt by FY20. Ready to capitalize on available opportunities SGC is well placed to capitalize on strong opportunities in the underlying markets of AP/Telangana, where demand has grown in excess of 20% YoY over the past months. We expect cement demand in AP/Telangana to grow at 12-15% over the next two years, driven by the government s push toward infrastructure development and creation of a new state capital of Amravati (Andhra Pradesh). This is likely to result in strong volume growth for SGC. Diversification and low-cost capacity addition to bring in stability In an attempt to diversify geographically, SGC is likely to increase capacity by ~35% over FY17-19 at a minimal capex of INR2b (USD20/t) by way of debottlenecking and brownfield expansion. With capacity ramp-up in Bayyavaram, SGC is likely to increase its presence in east, which has seen strong growth. Low-cost capex will meaningfully improve its return ratios, in our view. Cost efficiencies to further drive margins SGC is likely to improve its cost curve over the medium term, led by i) stabilization of WHRS, ii) commissioning of the 18MW thermal power unit, iii) lead distance reduction for the eastern markets due to capacity expansion in Vizag and iv) impact of positive operating leverage, driven by volume growth. Available at a discount to peers SGC intends to double capacity every 10 years via low-cost brownfield expansion and debottlenecking projects, given that it has access to large limestone reserves. This is likely to structurally improve its return ratios. We believe that given the prospects of strong sustainable growth, SGC is attractively priced at EV/t of ~USD60-65 a significant discount to replacement cost of USD110/t. Our coverage universe is a wide representation of investment opportunities in India. However, there are many emerging midcap names that are not under our coverage. Spotlight is our attempt to feature such stocks based on fundamental analysis and site visits, without initiating formal coverage on them. Spotlight adopts a descriptive rating system, which uses terms like Interesting, Cautious and In Transition (see definitions alongside). We do not assign Buy, Sell or Neutral recommendations to the stocks under Spotlight. Investors should carefully read Motilal Oswal Research in its entirety, and not draw inferences from the ratings alone. Ratings should not be used or relied upon as investment advice. Stock Info Bloomberg SGC IN CMP (INR) 872 Equity Shares (m) 20.4 M.Cap. (INR b) / (USD b) 17.8 / Week Range (INR) 940 /605 1, 6, 12 Rel. Per (%) -2/-9/-4 Financial Snapshot (INR m) Y/E March 2015* Sales 6,351 8,624 9,416 EBITDA 597 1,231 1,104 Adj. PAT for OI Adj. EPS (INR) Adj. EPS Gr. (%) L/P 274 P/L BV/Sh. (INR) RoE (%) RoCE (%) Valuations P/E (x) 6 40 NA P/BV (x) EV/EBITDA (x) *Standalone Shareholding pattern (%) As On Sep-16 Jun-17 Sep-17 Promoter DII FII Others FII Includes depository receipts Stock Performance (1-year) Sagar Cements Sensex - Rebased Nov November 2017 Update Sector: Cement Sagar Cement Feb-17 May-17 Aug-17 Nov-17 Interesting: Currently, the analyst believes that this is an interesting stock based on its fundamental strength Cautious: Currently, the analyst does not have adequate conviction based on fundamental assessment of the stock In Transition: Currently, the analyst thinks that the stock is in transition from "Cautious" to "Interesting" Abhishek Ghosh Research analyst (Abhishek.Ghosh@motilaloswal.com); Pradnya Ganar Research analyst (Pradnya.Ganar@motilaloswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Well placed to capture demand revival in AP/Telangana Cement demand in its focus markets of AP/Telangana has been growing at a sustainable rate of 15-20% YoY over the past months. Demand growth in its underlying markets of AP/Telangana will continue to be strong, given creation of a new capital (Amaravati) of AP, demand from the 2BHK housing scheme, and infrastructure push. Strong demand from irrigation projects like Mission Bhagiratha, Mission Kakateeya, Kaleswaram and Polavaram will further fuel demand growth. Over the medium-to-long term, demand revival in TN and Karnataka should drive strong growth for SGC. Strong demand growth in AP/Telangana The company s key focus regions of AP/Telangana witnessed demand growth of 14% YoY in FY17 and 8% YoY in 1HFY18, led by i) low-cost housing and 2BHK housing schemes, ii) road construction by NHAI, iii) irrigation projects like Mission Bhagiratha, Mission Kakateeya, Kaleswaram and Polavaram, and iv) development of commercial and government infrastructure in Amaravati. We expect demand to remain strong in the region, given the government s focus on infrastructure development and also formation of a new state (which will require creation of infrastructure). Cement demand in south increased ~7% YoY in FY17, as strong growth in AP/Telangana was partially offset by muted demand in Tamil Nadu. However, in 1HFY18, demand in south declined by 4% YoY due to weakness in TN (demand down by ~20% YoY) and Kerala (by 8%). Exhibit 1: Demand trend in south South demand (mt) 13% 12% 7% South YoY growth -3% -7% -2% QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 Demand in Tamil Nadu remains weak (down ~20% in 1HFY18; marginal decline in FY17) on account of (i) poor monsoon (although some recovery is expected this year), ii) sand mining ban (not resolved to date) and iii) political instability (leading to weak infrastructure spend). 30 November

3 Exhibit 2: AP/Telangana grew by 21% in 2QFY18 Andhra Pradesh and Telangana demand (mt) AP/Telangana YoY growth 29% 21% 21% 15% -2% -3% Exhibit 3: while Tamil Nadu declined by 22% Tamil Nadu demand(mt) Tamil NaduYoY growth 8% 0% 3% -13% -14% -22% QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 Demand in Kerala appears to be reviving, with healthy growth in September 2017 versus an 8% YoY decline in 1HFY18. Demand in Karnataka was muted (flat growth) in 1HFY18. However, in 2HFY18, cement demand is likely to grow at a healthy rate, as the upcoming election may lead to increased infrastructure spend. Exhibit 4: Kerala declined by 4% in 2QFY18 Kerala demand (mt) Kerala YoY growth 18% 13% 9% 5% -4% -11% QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 Exhibit 5: while Karnataka grew by 3% in same quarter Karnatka demand (mt) Karnataka YoY growth 11% 8% 5% 2% 3% -2% QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 The eastern market is also likely to see strong growth in the medium term, led by housing schemes like Biju Pacca Ghar. SGC s capacity addition in Vizag will be primarily focused on the eastern markets. 30 November

4 Diversifying into newer markets/products Over the past few years, SGC has increased its exposure to the higher-priced markets of TN/Kerala by way of acquisitions. It has also increased its presence in Odisha via the acquisition of the Bayyavaram grinding unit, and thus, diversified away from being predominantly an AP/Telangana cement player. Via its plant in Mattampally, the company has expanded its presence in Maharashtra, further de-risking its portfolio geographically. SGC is likely to increase capacity by 35% over the next 18 months at an incremental capex of ~USD20/t (low-cost). This should improve its return ratios. SGC, by way of acquisitions, has improved its ability to service the higher-priced markets of Tamil Nadu and Karnataka (reduced lead distance has ensured cost efficiency). Additionally, it has diverted Mattampally plant volumes toward Maharashtra. The company has also acquired a grinding unit in Vizag to cater to the southern markets of Odisha. Exhibit 6: Locational advantage through acquisition synergies Capacity details SGC has cement capacity of 4.3mt Sagar Cement, Mattampally, Nalgonda, Telangana (3mtpa) SC(R) formerly known as BMM Cements, Gudipadu, Andhra Pradesh (1mt) Sagar Cement, Bayyavaram, Vishakhapatnam, Andhra Pradesh(0.3mtpa) These capacities cater to the markets of Andhra Pradesh, Telangana, Maharashtra, Karnataka, Orissa and Tamil Nadu. It has reduced its dependence on its key markets of Andhra Pradesh and Telangana from 54% in FY12 to 45% in FY17 by tapping growth opportunities in Karnataka, Maharashtra, Tamil Nadu and Orissa. 30 November

5 Capacity-building via acquisitions to boost reach in cost-effective manner SCL acquired a 1mtpa plant from BMM Cement in August 2015 at an enterprise value of INR5.4b, taking its cement capacity to 4mtpa. The acquisition was partially funded via cash generated from stake sale in the Vicat JV. The acquired entity was later named as SC(R). While BMM serves the markets of Rayalaseema and parts of Tamil Nadu and Karnataka, Mattampally serves the markets of AP/Telangana, Maharashtra and parts of Orissa. The BMM plant has consistently reported better realization than the Mattampally unit, as the markets served by BMM are better priced than those served by Mattampally. The acquisition has generated significant synergies by reducing average lead distance to less than 500km. The BMM acquisition has helped SGC to emerge as a strong force in the southern markets, with superior lead distance. This will help SCL improve its margins and reach. SCL has witnessed continuous improvement in realization, most of it coming from the states outside its key markets of Andhra Pradesh and Telangana. A channel mix of 70% trade and 30% non-trade, and a strong network of ~2,150 dealers, enables it to cater to these markets. Foraying into eastern markets SGC acquired a grinding unit of 0.3mt at Bayyavaram (Vizag), which will produce Portland Slag Cement (PSC) due to availability of slag in this region. Clinker will be supplied by the mother plant in Mattampally district, Nalgonda. The introduction of PSC will lead to improved profitability and reduced lead distance. Exhibit 7: Well-diversified market mix Exhibit 8: Region-wise sales 3% 17% 13% 6% 16% 45% Andhra Pradesh Karnataka Maharashtra Tamil Nadu Orissa Others 30 November

6 Exhibit 9: Mattampally plant gross realization (INR/t) Overall Average Andhra Pradesh Outside Andhra Pradesh Exhibit 10: Mattampally plant gross realization (INR/t) Mattampally Plant Gross Realization 1QFY Q1FY Q2FY Q3FY Q4FY Q1FY Telangana Andhra Pradesh Karnataka Maharashtra Odisha Tamil Nadu Chattisgarh Exhibit 11: Gudipadu plant gross realization (INR/t) Overall Average Andhra Pradesh Outside Andhra Pradesh Exhibit 12: Gudipadu plant gross realization (INR/t) Gudipadu Plant Gross Realization 1QFY Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Source: Company, MOSL Andhra Pradesh Karnataka Tamil Nadu Kerala Pondicherry Source: Company, MOSL Exhibit 13: Capturing southern Orissa through acquisition of Bayyavaram plant 30 November

7 Increasing capacity by ~35% over next 18 months at ~USD20/t SGC is likely to raise its capacity by ~35% over the next 18 months by increasing capacity of the Bayyavaram grinding unit from 0.3mt to 1.5mt at an incremental capex of INR1.75b. The expansion will be completed by September Additionally, it will increase capacity of the BMM plant by 0.25mt, which will take its capacity to ~5.8mt by end-fy19 at an estimated capex of INR 250mn. This translates into capex of ~USD20/t, which is at a significant discount to industry average of USD100/t. Exhibit 14: Capacity addition at significant discount to industry Capex cost (INR b) 2.0 Capacity to be added (mt) USD INR65 Capex/ t (in USD/t) 20 Capacity expansion planned amid industry downcycle The company added capacity at a CAGR of 5% over FY11-16, while demand remained flat. Thus, utilization was around 57% during this period. However, FY17-21 would see limited capacity addition, and demand is expected to revive on account of political stability, more infrastructure projects, low-cost housing projects, and NHAI and metro projects. Exhibit 15: Expect demand revival in south 30 November

8 Exhibit 16: Robust and well-thought-out expansion plan Vision to double every 10 years The company has a strategic vision to reach capacity of 6mtpa by FY20 by ramping up production at the acquired units. It also plans to add PSC in its product portfolio at SC(R). Exhibit 17: Vision to double every ten years 30 November

9 Cost curve to improve over FY17-FY19 SGC s cost curve is likely to improve over the next months, primarily led by lower power & fuel and freight costs. Power & fuel cost/t is likely to decline on stabilization of 6MW of WHRS and commencement of the 18MW thermal power plant at the Mattampally unit. Freight cost/t is likely to decline due to lead distance reduction on account of scaling up of capacity at the Bayyavaram unit, which will cater to the eastern markets. SGC completed commissioning of 6MW WHRS in Mattampally and 1MW of solar power plant in 2QFY18. Stabilization of WHRS is likely to reduce the cost curve for the company in 2HFY18. 25MW of thermal capacity is available at the BMM plant, which is also used for fulfilling power requirement at the Mattampally plant at INR5.5/unit. The expanded Vizag unit will also require 8-9MW of power, which will be served by BMM at INR4.5/unit. This is at a discount to grid tariff of INR6/unit. SGC s power & fuel cost reduced by 8% in the last six quarters, despite a 53% increase in petcoke prices. Additionally, commissioning of the 18MW thermal power plant in Mattampally unit will reduce its cost of power from INR6/unit to INR3.5/unit, could potentially reduce power cost/t by INR200 for the Mattampally unit. Exhibit 18: SGC s captive power capacities Capacity (MW) Location Capex in mn Status Sagar Cement WHRS 6 Mattampally 652 Commissioned Sagar cement -Thermal plant 18 Mattampally 994 Commissioning by Dec 2018 Sagar cement solar plant 1 Mattampally 47 Commissioned SC(R) Thermal plant 25 Gudipadu, AP Total 50 Exhibit 19: Power & fuel cost reduced by 8% in last six quarters, despite 53% increase in petcoke prices Power and Fuel cost (Rebased to 100) Petcoke prices (Rebased to 100) 131% 140% 137% 151% 153% 100% 91% 85% 78% 85% 92% Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Source: Company, MOSL The Mattampally plant uses 100% petcoke, while the BMM plant uses imported coal. Cost differential between petcoke and imported coal is ~17% (petcoke cheaper than imported coal). In view of this, SCL is ramping up the usage of petcoke at BMM. 30 November

10 Exhibit 20: Cost comparison of coal and petcoke Price in INR/kcal Imported coal 1.2 Domestic coal 1.3 Petcoke 1 Source: Company Exhibit 21: Higher usage of international coal at BMM (%) International Domestic Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Exhibit 22: Cost trend of international and domestic coal Imported coal average cost (Rebased to 100) 140% Indigenous average cost (Rebased to 100) 134% 125% 100% 113% 108% 111% 107% 106% 102% 91% 93% 96% 85% 87% 99% 98% 99% 74% Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Source: Company, MOSL 30 November

11 Freight cost to reduce led by lower lead distance Post the commissioning of the railway siding in 4QFY16, SGC s transport through rake has been on an increase. This will help SCL to reduce its dependence on road and improve its reach to profitable markets. Capacity increase at the Bayyavaram unit will reduce lead distance further to the eastern markets, resulting in lower freight cost. Freight cost to reduce with railway siding SCL set up a railway siding at its Mattampally unit in 4QFY16 to cater to the faroff markets of Kerala, Assam, Bangalore and Orissa at a capex of INR1.23b. This could potentially result in annual savings of INR m in freight cost for SCL. Exhibit 23: Expect increased transport through rail Exhibit 24: Freight cost/t should decline going forward (INR/tonne) 1% 4% 2% ROAD RAIL 1% 2% 2% 897 1,000 1,032 Freight cost/ton % 98% 99% 98% 98% 96% Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 FY12 FY13 FY14 FY15 FY16 FY17 Acquisition of the BMM plant has also reduced the lead distance to Tamil Nadu and Kerala. These markets accounted for 33% of SCL s revenue in FY17, as against 21% in FY13. Effective lead distance has reduced from 600km to 450km after the acquisition of the BMM unit. Exhibit 25: Reduction in lead distance through BMM acquisition (Lead distance in km) Before BMM acquisition After BMM acquisition Tamil Nadu Karnataka Kerala Source: Company, MOSL 30 November

12 Trades at a significant discount to peers Available at discount to peers: SGC intends to double capacity every 10 years through low cost brownfield expansion and debottlenecking projects given it has access to large limestone reserves. This is likely to structurally improve its return ratios. We believe given the prospects of strong sustainable growth, SGC is attractively priced at EV/t of ~USD60-65 a significant discount to replacement cost of USD110/t. Exhibit 26: EV/t of USD60 on FY19E is at a discount to peers EV/ton Capacity % FY19E (mt) discount (USD) Sagar Cement * Sanghi* Heidelberg* Orient Cement JK Lakshmi Cement JK Cement Birla Corporation India Cement Ramco Cements Dalmia Cements Source: Company, MOSL, *Bloomberg Exhibit 27: EV/EBITDA of 8.4 on FY19E discount to most peers EV/EBITDA Capacity % FY19E (mt) discount (x) Sagar Cement* Sanghi* Heidelberg* Orient Cement JK Lakshmi Cement JK Cement Birla Corporation India Cement Ramco Cements Dalmia Cements Source: Company, MOSL, *Bloomberg 30 November

13 Financials and valuations Consolidated - Income Statement (INR Million) Y/E March FY12* FY13* FY14* FY15* FY16 FY17 FY18E FY19E Total Income from Operations 6,691 7,212 5,611 6,351 8,624 9,416 11,939 14,769 Change (%) Raw Materials ,369 1,045 1,324 1,638 Manufacturing Expenses 2,324 2,657 2,292 2,619 2,929 3,604 4,418 5,465 Employees Cost Other Expenses 2,304 3,307 2,282 2,229 2,679 3,233 3,867 4,428 Total Expenditure 5,564 6,790 5,363 5,754 7,393 8,312 10,156 12,207 % of Sales EBITDA 1, ,231 1,104 1,784 2,562 Margin (%) Depreciation EBIT ,285 2,017 Int. and Finance Charges Other Income , PBT bef. EO Exp , ,444 EO Items PBT after EO Exp , ,444 Total Tax Tax Rate (%) Reported PAT , Adjusted PAT for other income Change (%) P/L L/P 274 P/L L/P 103 Margin (%) *Standalone Consolidated - Balance Sheet (INR Million) Y/E March FY12* FY13* FY14* FY15* FY16 FY17 FY18E FY19E Equity Share Capital Total Reserves 2,423 2,491 2,235 5,039 5,317 7,426 7,866 8,796 Net Worth 2,597 2,664 2,409 5,213 5,491 7,630 8,070 9,000 Total Loans 2,078 2,244 2,050 2,453 4,343 4,866 4,866 4,866 Deferred Tax Liabilities Capital Employed 5,121 5,354 4,781 8,141 9,851 12,549 12,990 13,920 Gross Block 4,909 5,135 5,346 5,548 11,853 12,757 13,800 15,118 Less: Accum. Deprn. 1,475 1,729 1,995 2,214 2,668 3,139 3,638 4,183 Net Fixed Assets 3,434 3,406 3,351 3,334 9,185 9,618 10,162 10,936 Goodwill on Consolidation Capital WIP , Total Investments Curr. Assets, Loans&Adv. 2,265 2,446 2,062 5,515 2,743 4,524 4,874 5,533 Inventory ,104 1,348 1,621 Account Receivables ,025 1,268 Cash and Bank Balance , ,705 1,350 1,221 Loans and Advances 897 1,015 1,113 2, ,151 1,423 Curr. Liability & Prov. 1,507 1,574 1,892 1,830 2,619 2,536 3,148 3,830 Account Payables ,324 1,478 1,805 2,170 Other Current Liabilities , ,008 1,278 1,581 Provisions Net Current Assets , ,988 1,726 1,702 Appl. of Funds 5,121 5,354 4,781 8,141 9,851 12,549 12,990 13,920 E: Bloomberg Estimates;*Standalone 30 November

14 Financials and valuations Ratios Y/E March FY12* FY13* FY14* FY15* FY16 FY17 FY18E FY19E Basic (INR) Adj EPS Cash EPS BV/Share DPS Payout (%) N/A Valuation (x) P/E N/A Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE RoIC Working Capital Ratios Asset Turnover (x) Debtor (Days) Creditor (Days) Leverage Ratio (x) Current Ratio Interest Cover Ratio Net Debt/Equity Consolidated - Cash Flow Statement (INR Million) Y/E March FY12* FY13* FY14* FY15* FY16 FY17 FY18E FY19E OP/(Loss) before Tax , ,444 Depreciation Interest & Finance Charges Direct Taxes Paid (Inc)/Dec in WC CF from Operations ,893 1, ,456 1,981 Others , CF from Operating incl EO ,289 1,010 1,456 1,981 (Inc)/Dec in FA ,200-1,500 Free Cash Flow ,413 1, (Pur)/Sale of Investments , Others ,816-1,189-1, CF from Investments ,852-1,064-1,454-1,126-1,426 Issue of Shares ,500 2, Inc/(Dec) in Debt , Interest Paid Dividend Paid CF from Fin. Activity ,353 2, Inc/Dec of Cash ,147-2,128 1, Opening Balance , ,705 1,350 Closing Balance , ,705 1,350 1,221 E: Bloomberg Estimates;*Standalone 30 November

15 N O T E S 30 November

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The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative products as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. 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Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information that is already available in publicly accessible media or developed through analysis of MOSL. The views expressed are those of the analyst, and the Company may or may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. 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Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai ; Tel No.: ; Correspondence Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad (West), Mumbai Tel No: Compliance Officer: Neeraj Agarwal, Id: na@motilaloswal.com, Contact No.: Registration details of group entities.: MOSL: SEBI Registration: INZ (BSE/NSE/MSE); CDSL: IN-DP ; NSDL: IN-DP-NSDL ; Research Analyst: INH AMFI: ARN Investment Adviser: INA Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP ) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.: INP ) offers wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Commodities Broker Pvt. Ltd. offers Commodities Products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products 30 November