111% rally from March lows, analysts say this smallcap is cementing a long-term growth story

Brokerages on Dalal Street have turned bullish on Telangana-based Sagar Cements following a slew of tailwinds, including projections of demand improvement in core markets, relatively better realisations in recent times, efficient operations and capacity addition in new regions.

The stock has already advanced 111 per cent to Rs 520 as of October 1 from its 52-week low Rs 246 hit on March 25 this year. That compares with a 73 per cent gain logged by BSE Smallcap index in the same period.

Earlier, the stock rose 66 per cent in last five years till December 31 2019, when BSE Sensex gained 22 per cent.

Nirmal Bang Securities has recommended buying Sagar Cements from a long-term perspective. Once the new facilities stabilise, faster cash flow generation will result in relatively lower leverage leading to re-rating of multiples, it said.

“Sagar Cements is one of our preferred picks in the smallcap cement space, and we believe it is one of the best smallcap ideas with potential of exponential gains over next three to four years,” Nirmal Bang said.

Last year, the company acquired majority stake in Madhya Pradesh-based Satguru Cement and entire stake in Odisha-based Jajpur Cements. Through these acquisitions, it is setting up a 1 million tonnes greenfield integrated cement plant in MP and a 1.5 million tonne grinding unit in Odisha.

Aiming at 10 million tonnes per annum capacity by 2025, the company’s ongoing 2.5 million tonne expansions in MP and Odisha will take it to 8.25 million tonnes per annum by Q2FY22.

The company produces a variety of cements such as ordinary Portland, Portland Pozzalona and sulphate resistant cement. It has improved operating performance with cost optimisation measures like thermal plant efficiency, reduced lead distance, softening of input prices, commissioning of the captive power plant and favourable fuel mix.

Analysts believe the expansion in new states will rationalise freight costs. The company may also see a sturdy profit thanks to the combined benefits of better prices, reduced costs and regional diversification.

Nirmal Bang expects a substantial improvement in cash profits for the company over FY20-FY22 and projects Ebitda and net profit growth of 29 per cent and 75 per cent, respectively, over this period.

The company reported 30 per cent growth in standalone net profit at Rs 34.73 crore for the year ended March 31. However, gross sales declined 6 per cent YoY to Rs 847.58 crore. Topline stood at Rs 26.62 crore for FY19 against Rs 49.39 crore in FY18.

“The current strong pricing environment and greater operating efficiencies are expected to result in robust operations. With a re-rating on the cards on capacity addition over the next one year, we retain our ‘buy’ rating on Sagar Cements with a price target of Rs 733,” said Anand Rathi Shares and Stock Brokers.

Institutional investors, too, seem to like the company. Latest shareholding data showed promoters held 50.16 per cent stake as of June 30, while public shareholders including mutual funds had 11.17 per cent, foreign portfolio investors (FPI) 2.88 per cent and insurance companies 1.51 per cent. The stock commands a market-cap of Rs 1,145 crore.

In terms of leverage and other key risks, the company’s gross debt stood at Rs 480 crore as of June 30. This consists of Rs 350 crore in long-term loans and Rs 130 crore in working capital.

There are expectations that the long-term debt will peak at Rs 800 crore by FY22 due to ongoing capex plans. Current debt-to-equity ratio stands at 0.33 times and the debt-to-Ebitda ration at 2.5 times, which seem to be on the higher side.

Nirmal Bang says these figures should be manageable considering the capacity addition in the central and eastern regions. On the other hand,

Anand Rathi said annual debt repayments would be in the Rs 130-150 crore range, which will not be difficult for the company to pay despite volatility in earnings.