Sagar Cements (SAGCEM) 739

Transcription

1 Result Update Rating matrix Rating : Buy Target : 9 Target Period : months Potential Upside : 22% What s changed? Target Changed from 11 to 9 EPS FY19E Changed from 21.8 to 19.5 EPS FY2E Changed from 3. to 28.1 Rating Unchanged Quarterly performance Q1FY19 Q1FY18 YoY (%) Q4FY18 QoQ (%) Revenue EBITDA (14.2) EBITDA (%) bps bps PAT (41.6) Key financials Sales ,38.1 1, ,413.3 EBITDA EBITDA margin (%) Adjusted PAT Adjusted EPS Valuation summary (X) FY17 FY18E FY19E FY2E P/E (Adjusted) EV / EBITDA P/BV RoNW(%) (.5) RoCE(%) Stock data Particular Amount Market Capitalisation ( crore) 1,711.6 Debt ( crore) (FY18) Cash and Cash Equivalent ( crore) (FY18) 58.1 Enterprise Value ( crore) 2, week High / Low ( ) 1161/745 Equity Value 2.4 Face Value ( ) 1. Price performance 1M 3M 6M 12M Heildelberg Cem India Cement JK Cement JK Lakshmi Cem Sagar Cement Research Analyst Rashesh Shah rashes.shah@icicisecurities.com Devang Bhatt devang.bhatt@icicisecurities.com Pricing pressure dents margins July 2, 218 Sagar Cements (SAGCEM) 739 Sagar Cement s results were above our estimates. Revenues increased 6.2% YoY to crore (vs. I-direct estimate of crore) in Q1FY19 mainly led by 19.1% YoY growth in volumes to.75 MT (vs. I- direct estimate of.75 MT). However, realisation declined 1.3% YoY to 3,79/t (vs. I-direct estimate of 3,644/t) EBITDA margin declined 316 bps YoY to 13.3% mainly led by higher freight cost (up 14.5% YoY) and raw material cost (up 55.8% YoY). However, EBITDA margins remained above our estimate of 12.7% mainly led by lower than anticipated power cost. The company s EBITDA/t declined 27.6% YoY 492/t (vs. I-direct estimate of 464/t) Reported net profit declined 41.6% YoY to 5.8 crore mainly led by higher depreciation expenses (up 7.9% YoY) The company has commissioned 1.2 MT grinding unit at Bayyavaram, Andhra Pradesh. The company is expected to commission 18 MW power plant at Mattampally by Q4FY19E Volume growth to remain robust in coming years Increased government spending on low cost housing, irrigation and other infra projects, especially in AP and Telangana have led to better volume growth over in Q1FY19. Going forward, a revival in rural economy, better monsoon and infra boost is expected to drive volumes. In addition, better sand availability in Tamil Nadu and higher volume push to non southern region (like Maharashtra and Odisha) may further boost cement volumes in coming years. Considering this coupled with capacity expansion of ~1.2 MT, we expect revenues to grow at 14.9% CAGR in FY18-2E. Power, freight cost rationalisation to drive margins The company has commissioned 6 MW waste heat recovery (WHR) and 1 MW solar capacity at its Mattampally plant. The benefits of the same have helped reduce power cost (~ 4-5 crore per quarter). In addition, an increase in WHR capacity by 2 MW to 8 MW will save ~ 2/t on clinker. Further, the company s de-bottlenecking & addition of cooler at BMM plant will further help reduce power & fuel cost. Also, capacity expansion of 1.2 MT grinding unit at Vizag will enable the company to introduce slag cement, which will help save freight and raw material cost. This coupled with incentives at the Vizag unit have the potential to generate ~ 1 crore savings over next seven years. Further, commissioning of captive power plant by March 219 at Mattampally will enable the company to save ~ 15-2 crore (~ 45-6/t). Robust demand, capacity expansion to drive growth; maintain BUY! The company generates ~4-5% of its sales from Andhra Pradesh and Telangana. These markets have the highest allocation of low cost housing under PMAY scheme and also have made heavy spending on irrigation and other infra projects. As a result, we expect cement demand in these regions to remain healthy over the next two years. In addition, a hike in minimum support price and better monsoon should help increase the share of trade segment, which, in turn, will help reduce pricing pressure. Further, cost rationalisation through installation WHR, captive power plant at Mattampally and expansion of grinding unit should help improve margins, going forward. The recent correction in stock price has led the stock to trade at attractive valuation (i.e. FY2E EV/tonne of US$43/t way below the current replacement cost). Hence, we maintain our BUY rating on the stock with a revised target price of 9/share (i.e. valuing at FY2E EV/tonne of US$7). ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q1FY19 Q1FY19E Q1FY18 YoY (%) Q4FY18 QoQ (%) Comments Total Operating Income Other Income Robust volume growth of 19.1% was offset by 1.3% YoY decline in realisation limiting revenue growth to 6.2% YoY Raw Material Expenses Higher raw material cost was owing to increased production during Q1FY19 Employee Expenses Stock Adjustment... NA. NA Power & Fuel Setting up of WHRMS, stabiliastion of BMM plant and higher usage of pet coke at BMM have led to lower power cost Freight cost Increase in freight cost was due to rise in diesel prices Others EBITDA EBITDA Margin (%) bps bps Higher input cost led to dip in margins Interest Depreciation PBT Total Tax PAT Rise in depreciation cost and lower other income led to decline in PAT Key Metrics Volume (MT) Robust demand in AP & Telangana market led to higher volumes in the quarter Net realisation ( ) 3,79 3,644 4, ,7.3 Cement EBITDA per Tonne ( ) Higher RM cost/t led to decline in EBITDA/t Change in estimates FY19E FY2E ( Crore) Old estimate New % Change Old estimate New % Change Comments Revenue 1,285. 1, , , EBITDA EBITDA Margin (%) bps bps PAT EPS ( ) Capacity expansion and infra spending to drive revenues over next two years Cost rationalisation to boost margins by 5 bps over FY18-2E Assumptions FY19E FY2E Volume (MT) Volumes to grow at a CAGR of 14.9% over next two years Gross Realisation ( ) 3,717 4,542 3,697 3,878 3,916 3,995 3,975 4,54 Cement EBITDA per Tonne ( ) We expect EBITDA/t to stabilise at 65/t in FY2E ICICI Securities Ltd Retail Equity Research Page 2

3 Well poised to ride up-tick in demand Going forward, we expect cement demand in the Andhra Pradesh and Telangana region to improve mainly led by infrastructure projects like Polavaram project and Telangana housing scheme. Further, the Andhra Pradesh government has proposed to invest 32, crore to develop its new capital Amaravathi. We believe all cement companies in the vicinity of AP and Telangana will be a direct beneficiary of increased demand (CAGR of 15% in the next two to three years). In addition, better sand availability in Tamil Nadu and improving demand in Karnataka are expected to further boost cement demand. As a result, the entire southern region is expected to increase at a CAGR of 8.% over the next few years. Exhibit 1: Demand supply dynamics of South India Million tonnes FY12 FY13 FY14P FY15 FY16 FY17 FY18 Effective Capacity Production Capacity Utilisation (%) Consum ption Consumption Growth(%) Surplus/Deficit Company to increase capacity by 34.9% over FY18-2E Exhibit 2: Capacity trend Volumes Conference call highlights Industry overview: The company expects AP and Telangana to grow at 15%, TN and Kerala to de grow 5%, Karnataka to grow 5.% and Maharashtra to grow 1% in FY19E. Pricing decline in Q1FY19 was due to an increase in competition. Realisations are expected to improve only from Q3FY19E onwards. Capex: Captive power plant (CPP) is expected to be commissioned by March 219. Guidance: The company expects to register 3.2 MT volumes in FY19E. Further, installation of cooler at BMM will further save cost ( 15-2/t). Also, 99% trucks in AP and Telangana have no overloading, which, if implemented, could save cost. Data points: The company s lead distance is 357 km vs. 375 km in Q4FY18, Trade: non trade is 65:35, OPC: PPC is 6:4. BMM is now operating at 1% pet coke. Slag cost has increased by 25/t in Q1FY19. The company is operating at mat rate. ICICI Securities Ltd Retail Equity Research Page 3

4 Expect revenue CAGR of 16.7% during FY18-2E Revenues have grown at a CAGR of 13.2% in FY13-18 mainly led by moderate volume growth at 11% CAGR in FY Further, in FY18-2E, we expect volume CAGR of 14.9% in FY18-2E mainly led by higher infra spend and revival in rural economy. Further, we expect realisation to increase at 1.5% CAGR in FY18-2E led by a pick-up in demand. Consequently, revenues are expected to grow at 16.7% CAGR in the next two years. Exhibit 3: Revenues to increase at CAGR of 16.7% over FY18-2E Crore Exhibit 4: Capacity details Current capacity FY18 Cement (MT) 4.3 Additions Grinding unit at Vizag 1.2 BMM.3 FY2E cement capacity 5.8 Net Sales Exhibit 5: Volumes to increase at CAGR of 14.9% over FY18-2E Exhibit 6: Realisation to expected to improve gradually mn tonnes ( ) Volumes Realisation Exhibit 7: Quarterly volume trend Exhibit 8: Quarterly realisation trend mn tonne Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Volume Realisation ICICI Securities Ltd Retail Equity Research Page 4

5 Margins to improve led by operating efficiency Power cost rationalisation led by commissioning of WHR and solar power, commissioning of grinding unit and captive power plant are expected to boost margins over the next few years. We expect margins to increase 5 bps in FY18-2E. Exhibit 9: EBITDA/t expected at 65/t in FY2E Exhibit 1: EBITDA margin to increase 5 bps in FY18-2E /tonne % 18.% 16.% 14.% 12.% 1.% 8.% 6.% 4.% 2.%.% 16.2% 13.6% 14.6% 14.2% 15.1% 9.8% EBITDA/tonne EBITDA margin Exhibit 11: Quarterly EBITDA/t Exhibit 12: Quarterly EBITDA margin /tonne Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 % 2.% 15.% 1.% 5.%.% 16.4% 16.3% 12.7% 13.1% 13.3% Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 EBITDA/tonne EBITDA margin Exhibit 13: Net profit to increase at CAGR of 47.7% in FY18-2E % 6.% crore % 4.% 3.% 2.% % %.% -1.% Net profit Net profit margin ICICI Securities Ltd Retail Equity Research Page 5

6 Outlook and valuation The company generates ~4-5% of its sales from AP and Telangana. These markets have the highest allocation of low cost housing under PMAY scheme and have also made heavy infra spending in irrigation and other infra projects. As a result, we expect cement demand in these regions to remain healthy over the next two years. In addition, a hike in minimum support price and better monsoon should help increase the share of trade segment. This, in turn, will help reduce pricing pressure. Further, cost rationalisation through installation WHR, captive power plant at Mattampally and expansion of grinding unit should help improve margins, going forward. The recent correction in stock price has led the stock to trade at attractive valuation (i.e. FY2E EV/tonne of US$43/t way below the current replacement cost). Hence, we maintain our BUY rating on the stock with a revised target price of 9/share (i.e. valuing at FY2E EV/tonne of US$7). Exhibit 14: Key Assumptions Per Tonne Sales Volumes Net Realisation 3,717. 4, , , , ,994.7 Total Expenditure 3, ,86.6 3, , , ,389.8 Raw material Power & Fuel 1, , , , , ,225.4 Employees Freight Others EBITDA per Tonne Exhibit 15: EV/Tonne (US$) Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Million $ EV $15 $125 $1 $75 $25 Exhibit 16: Valuation Sales Growth EPS Growth PE EV/Tonne EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) ($) (x) (%) (%) FY NA FY NA FY19E FY2E ICICI Securities Ltd Retail Equity Research Page 6

7 Recommendation History vs. Consensus estimates 1,5 1. ( ) 1,25 1, (%). Jul-15 Aug-15 Sep-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Price Idirect target Consensus Target Mean % Consensus with BUY Source: Bloomberg, Company, ICICI Direct Research Key events Date Event 1985 Established in Expansion by installing separate line calciner with 5 stage pre heater 28 Formed a JV with Vicat to set up a 5.5 mtpa cement plant in Karnataka 215 Acquired BMM Cements with a capacity of 1 mtpa with 25 mw CPP 215 Exited Vicat JV for a consideration of 425 cr 216 Commissioned grinding unit having a capacity of.3 MT 218 Expanded capacity at Bayyavaram in Anakapally district, Andhra Pradesh from.3 MT to 1.5 MT Top 1 Shareholders Rank Name Last filing date % O/S Position (m) Change (m) 1 AVH Resources India Pvt. Ltd. 31-Mar Sammidi (Veera Reddy) 31-Mar HDFC Asset Management Co., Ltd. 31-Dec Sammidi (Aruna) 31-Mar Sammidi (Anand Reddy) 18-Jun Sammidi (Sreekanth Reddy) 31-Mar Sammidi (Rachana) 31-Mar Sammidi (Vanajatha) 31-Mar IDFC Asset Management Company Private Limited 31-Mar Sagar Priya Housing & Industrial Enterprises, Ltd. 31-Mar Source: Reuters, ICICI Direct Research Shareholding Pattern (in %) Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Promoter FII DII Others Recent Activity Buys Sells Investor Name Value Shares Investor Name Value Shares HDFC Asset Management Co., Ltd India Infoline Asset Management Company Limited IDFC Asset Management Company Private Limited Dimensional Fund Advisors, L.P Sammidi (Anand Reddy).4. Source: Reuters, ICICI Direct Research ICICI Securities Ltd Retail Equity Research Page 7

8 Financial summary Profit and loss statement Crore (Year-end March) FY17 FY18 FY19E FY2E Total operating Income ,38.1 1, ,413.3 Growth (%) Raw material cost Power & fuel Freight cost Others Total Operating Exp ,86.2 1,199.3 EBITDA Growth (%) Depreciation Interest Other Income PBT Total Tax PAT PAT margin Adjusted PAT Growth (%) NA NA Adjusted EPS ( ) Cash flow statement Crore (Year-end March) FY17 FY18 FY19E FY2E Profit after Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity Inc/(dec) in loan funds Dividend paid & dividend tax Interest paid Others CF from financing activities Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY17 FY18 FY19E FY2E Liabilities Share Capital Reserve and Surplus Total Shareholders funds Total Debt Deferred Tax Liability Minority Interest / Others Total Liabilities 1, , ,41.4 1,469. Assets Gross Block 1, ,38.8 1, ,781.1 Less: Acc Depreciation Net Block ,13.8 1, ,283.5 Capital WIP Total Fixed Assets 1,17.1 1, , ,283.5 Investments Inventory Debtors Loans and Advances Other Current Assets Cash Total Current Assets Creditors Provisions Total Current Liabilities Net Current Assets Others Assets.... Application of Funds 1, , ,41.4 1,469. Key ratios (Year-end March) FY17 FY18 FY19E FY2E Per share data ( ) Adjusted EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin Adjusted PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E (adjusted) EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 8

9 ICICI Direct Research coverage universe (Cement) CMP M Cap EPS ( ) EV/EBITDA (x) EV/Tonne ($) RoCE (%) RoE (%) Company ( ) TP( ) Rating ( Cr) FY18 FY19E FY2E FY18 FY19E FY2E FY18 FY19E FY2E FY18 FY19E FY2E FY18 FY19E FY2E ACC* 1, Buy 23, Ambuja Cement* Buy 38, UltraTech Cem 3, Buy 15, Shree Cement 16, Hold 56, Heidelberg Cem Buy 3, India Cement Buy 3, JK Cement Buy 5, JK Lakshmi Cem Buy 3, Mangalam Cem Hold Star Cement Buy 4, Ramco Cement Buy 15, Sagar Cement Buy 1, *CY16, CY17E CY18E ICICI Securities Ltd Retail Equity Research Page 9

10 RATING RATIONALE ICICI Direct Research endeavours to provide objective opinions and recommendations. ICICI Direct Research assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICI Direct Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 1

11 ANALYST CERTIFICATION We /I, Rashesh Shah, CA, and Devang Bhatt, PGDBM Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a SEBI registered Research Analyst with Sebi Registration Number INH99. 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