Quarterly Result Update - Ventura Securities Ltd

Quarterly Result Update Sagar Cements Ltd. South markets continue to remain subdued Sagar Cements reported disappointing results for Q1FY17. Standalone revenues fell 26% YoY to Rs 136 crore on account of subdued pricing in the backdrop of weak demand scenario. Sagar Cements (standalone) reported volumes of 0.43 mn tones, a drop of 9% YoY. Average realisations fell from Rs 5259/tone to Rs 4394/tone. Capacity utilization levels dropped from 65% in Q1FY16 to 57% in Q1FY16. Clearly, these numbers indicate that demand in the Southern markets continue to be subdued. Sagar’s key markets -- Telangana, North Karnataka and North Coastal districts of Andhra Pradesh witnessed are the regions which witnessed maximum price correction. According to the management, while spending on rural roads and Mission Kakatia (restoration of tanks and lakes in Telangana) are the programs which have gained traction, the big ticket irrigation projects and affordable housing schemes are yet to take off. The decline in topline coupled with stable operating costs resulted in sharp decline in EBITDA margin – from 20.8% in FY16 to 9.6% in FY17. EBITDA/tone stood at Rs 306 in Q1FY17 as compared to Rs 821 in Q1FY16. Sagar has reported standalone PAT of Rs 4.6 crores, down 80% YoY. On a consolidated basis, Sagar reported revenues of Rs 197 crores and volumes of 0.57 mn tones. EBITDA margins were lifted to 13.2% as BMM reported EBITDA margins of 21.3% as the markets in which BMM operated did not witness as much price correction as in the markets serviced by Sagar’s Matampally plant. On a consolidated basis, Sagar reported PAT loss of Rs 25 lakhs on account of higher depreciation and finance expenses post consolidation of BMM. While the Q1FY17 numbers are disappointing on the margin front, we maintain our estimates: i) According to the management, realisations have seen an uptrend from the second half of May onwards. Also, given the steady progress of monsoons situation on the ground wrt government infrastructure projects is expected to improve in the coming quarters. ii) Power cost is expected to decline as the tariffs for the BMM plant have reduced from Rs 5.45/unit, which was aligned with the PPA that the company already has.

Recommendation (Rs) CMP Rating

628 HOLD

Index Details Sensex Nifty Industry

28,051 8,638 Cement

Scrip Details Mkt Cap (Rs cr) Eq Shares O/s (Cr) Avg Vol (Lakhs) 52 Week H/L Dividend Yield (%) Face Value (Rs)

1085 1.7 0.2 719/305 0.4 10.0

Latest shareholding pattern (%) Promoters 56.93 Public 43.07 Total 100.00

Stock performance (%) 1m 3m Sagar -6.5 15.6 Nifty 5.3 10.1 BSE - Bank 7.13 13.41

6m 51.0 14.2 23.15

While, we have reiterated in our Initiating Coverage report that we expect real demand uptick only

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Quarterly Result Update from FY18 onwards, we will closely monitor the progress of demand and realizations in the South. Further, we continue to expect that situation in the South should improve from here on as construction activity picks up in Amravati and irrigation projects of Telangana gain traction. We are positive on the prospects of Sagar Cements given: i) Synergy benefits wrt freight costs and power costs post the acquisition of BMM Cements is expected to kick in the coming quarters. ii) 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% growth during FY18-19. At the CMP of Rs 630, Sagar Cements is trading at an FY18 EV/EBITDA of 5.6x and EV/Tonne of 64$. We recommend accumulating the stock on dips. The current market price offers substantial upside potential considering that the financial performance of the company may improve substantially from FY18 onwards. The development of Amravati is expected to translate to significant cement growth for South-based players, especially Sagar, which is located within 100 kms of the to-be state capital. We retain our target price of Rs 940 for the stock.

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Quarterly Result Update Description Net Sales Other operational Income Total Oper. Income(TOI) Raw Materials Cons.% to TOI Stock adj. (-)Inc / (+)Dec% to TOI Net Raw Mat adj. for stock % to TOI Other expenses % to TOI Contribution Net_Sales Personnel % to TOI Total expenditure Operating Profit % to TOI Non-Operating Income Interest Exceptional Items Gross Profit Depreciation PBT before Extra-ord % to TOI Extraordinary Items PBT Tax Rate Prov. for Tax % to TOI Profit after Tax % to TOI Face Value Equity Share capital EPS (Rs.) CEPS (Rs.)

35

Q1FY17 135.5 0.9 136.4 18.2 13.4 8.7 6.4 26.9 19.8 87.5 64.1 22.0 9.0 6.6 123.4 13.0 9.5 8.6 6.9 0.0 14.7 6.4 8.2 6.0

Q1FY16 184.7 0.3 185.0 18.8 10.1 6.3 3.4 25.0 13.5 112.6 60.9 47.4 8.9 4.8 146.5 38.5 20.8 7.0 3.3 0.0 42.2 5.6 36.6 19.8

8.2 44.3 3.6 2.7 4.6 3.4 10.0 17.4 2.6 6.3

36.6 37.7 13.8 7.5 22.8 12.3 10.0 17.4 13.1 16.3

% Chg. -26.6 231.6 -26.3 -2.9 -39.9 -7.8 --22.4 --53.5 1.3 --15.8 -66.2 -22.4 110.9 0.0 -65.2 15.5 -77.5 --77.5 17.4 -73.6 --79.9 ----79.9 -61.2

Q1FY17 135.5 0.9 136.4 18.2 13.4 8.7 6.4 26.9 19.8 87.5 64.1 22.0 9.0 6.6 123.4 13.0 9.5 8.6 6.9 0.0 14.7 6.4 8.2 6.0

Q4FY16 152.1 1.3 153.4 14.3 9.3 -4.7 -3.1 9.6 6.3 106.0 69.1 37.7 12.0 7.8 127.6 25.8 16.8 7.9 8.6 0.0 25.1 7.5 17.6 11.5

8.2 44.3 3.6 2.7 4.6 3.4 10.0 17.4 2.6 6.3

17.6 13.4 2.4 1.5 15.2 9.9 10.0 17.4 8.8 13.1

% Chg.FY201603FY201503 -10.9 618.3 544.8 -27.8 3.5 3.3 -11.1 621.8 548.1 27.2 66.4 67.8 -10.7 12.4 LP 1.8 -10.6 -0.3 -1.9 180.0 68.2 57.2 -11.0 10.4 -17.5 420.0 397.8 -67.6 72.6 -41.7 133.6 93.1 -24.8 37.6 33.5 -6.0 6.1 -3.3 525.7 488.4 -49.6 96.0 59.7 -15.5 10.9 8.1 28.2 363.0 -20.1 29.0 23.1 0.0 0.0 0.0 -41.5 95.2 399.6 -14.3 23.4 21.5 -53.1 71.9 378.1 -11.6 69.0 0.0 -53.1 71.9 378.1 231.6 30.8 21.5 54.9 22.1 81.4 -3.6 14.9 -69.9 49.8 296.7 -8.0 54.1 -10.0 10.0 -17.4 17.4 -69.8 28.6 170.6 -51.5 42.1 183.0

% Chg. 13.5 5.6 13.4 -2.1 -LP -19.2 -5.6 -43.5 12.3 -7.6 60.9 --92.2 25.8 0.0 -76.2 8.7 -81.0 -0.0 -81.0 42.9 -72.8 --83.2 ----83.2 -77.0

st


Quarterly Result Update

Capacity Utilisation Trend

Geography wise sales trend % 100 6

80%

90

70%

80

60% 50% 40%

70

12

60

11

5 23

9

9

22

20

16

21

20

22

15

13

33

36

15

18

7

7

10

19 21 13

50

30%

30

10%

18

53

20

in mn tonnes

Karantaka

Tamil Nadu

Maharashtra

Revenues and Revenue Source: Federal Bank, Ventura Research 6000

20

21

12 6

10 4

45

52

55

Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 AP & T

Rs/tonne

8

0

Capacity Utilization

andResearch Realisation Source: FederalVolumes Bank, Ventura

29

10

Q1FY17

Q4FY16

Q3FY16

Q2FY16

Q1FY16

Q4FY15

Q3FY15

Q2FY15

Q1FY15

0%

37

36

8

7

16

15

40

20%

0.60

17

250.00

Orrisa

Others

growth

in Rs crs

60% 50%

0.50

5000

0.40

4000

200.00

40% 30%

150.00 0.30

20% 10%

3000

100.00 0.20

2000

0.10

1000

0.00

0

0% -10%

50.00

-20% -30%

Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Volumes

Realisation (RHS)

0.00

-40% Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Revenue

Revenue Growth (YOY) s

Source: Sagar Cements, Ventura Research

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Quarterly Result Update EBITDA and EBITDA per tonne

EBITDA and PAT margin

in Rs crs

45.00

Rs per tonne

250

1,000

40.00

900

35.00

800

200 150

700

30.00

600

25.00

100

500 20.00

400

15.00

50

300

10.00

200

5.00

100

0.00

0

0

Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 -50

Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 EBITDA margin

EBITDA per tonne

Source: Sagar cements, Ventura Research


200

200

100

0

0

8.5X

10X

11.5X

Jan-16

Jul-15

Sep-15

7X

13X

CMP

1X

1.2X

1.4X

1.6X

Jun-16

400

Jun-15

300

Jun-12

600

Jun-10

400

Mar-16

800

Feb-16

500

Dec-15

1000

Nov-15

600

Oct-15

1200

Aug-15

700

Jun-15

1400

May-15

1600

Jun-14

1 Yr Forward P/BV 800

Jun-11

1 Yr Forward EV/EBITDA multiple

EV

PAT margin

es

Jun-13

EBITDA

1.8X

es v


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