Buy Sagar Cements; target of Rs 350: ICICI Direct

ICICI Direct's research report on Sagar Cements

Sagar Cements saw another weak quarter as volume recovery was hit by the disruption caused by the virus outbreak. Revenues for Q4FY20 declined 17% YoY to Rs 303.6 crore (vs. I-direct estimate: Rs 295 crore) as volumes for the quarter remained subdued. Volumes were at 0.84MT, down 11.3% YoY (vs. I-direct estimate: 0.83). Amid weak demand and a consequent weaker pricing scenario in Sagar’s major markets, average realisations dropped 6.4% YoY to Rs 3,627/t (vs. I-direct estimate: Rs 3,682/t). EBITDA margins deteriorated by 217 bps YoY to 14.7% (vs. I-direct estimate: 13.6%) and EBITDA/t declined 18.5% YoY to Rs 533/t (vs. I-direct estimate: Rs 497/t). Lower profitability during the quarter is attributable to lower realisations per tonne. Some respite was seen in the form of savings in P&F costs that fell 13% YoY on a per tonne basis. On an absolute level, EBITDA dropped 27.7% YoY to Rs 44.7 crore (vs. I-direct estimate: Rs 40 crore). PAT shrank 94% YoY to Rs 1.2 crore (vs. I-direct estimate: Rs 5 crore) owing to higher tax expenses.

Outlook

While private demand could be weak and recovery could be prolonged, government spending, like what has been promised by the Andhra Pradesh government could provide cushion to falling demand. Furthermore, Sagar Cements is currently available at an FY20 EV/t of $30, implying a considerable margin of safety to the replacement cost of $100-110. We, thus, maintain BUY rating but keep our upside limited maintaining caution. We value the company at 8x FY22E EV/EBITDA to arrive at a TP of Rs 350.

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