Buy Sagar Cements, target Rs 740: Reliance Securities

Reliance Securities has given a buy recommendation on Sagar Cements (SGC) with a target price of Rs 740.

Shares of Sagar Cements closed at Rs 635 on 24 May, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

March quarter highlights:

• SGC’s consolidated sales volume grew by nearly 19 per cent year-on-year (YoY), up 3 per cent quarter-on-quarter (QoQ) to 0.94mnT, which aided SGC to witness revenue growth of 24 per cent YoY and 15 per cent QoQ to Rs 365 crore, said the brokerage.
• As per the brokerage, sustained demand environment in AP/Telangana, Karnataka and Odisha markets aided volume growth. Utilisation at Mattampally and Gudipadu units stood at 62 per cent and 78 per cent, respectively, while Bayyavaram utilisation stood at mere 62 per cent at expanded capacity.

A sharper-than-expected improvement in average realisation along with strong sales volume aided SGC to report 59 per cent YoY growth in Ebitda to Rs 61.8 crore. Consolidated Ebitda/tonne improved to Rs 654 in Q4FY19 against Rs 487 in Q4FY18 and Rs 327 in Q3FY19.

Average realisation improved by 12.6 per cent QoQ to Rs 3,874 mainly due to sharp price recovery in AP/Telangana markets.

Investment rationale:

The brokerage expects SGC to report Ebitda per tonne of Rs 684 and Rs 691 in FY20E and FY21E, respectively, aided by realisation recovery in Eastern markets and improved cost efficiency post commissioning of CPP.

"We believe a sustained pricing environment in Southern markets, recent recovery in Eastern realisation, commissioning of 18 MW CPP and further ramp-up in WHRS capacity and hydel power are likely to aid its performance in subsequent quarters," said the brokerage.

Further, geographical diversification in Central region and higher blended cement bode well for SGC in the long-run, the brokerage added.

"At the current market price, the stock trades at 7.1 times and 7.2 times Ebitda of FY20 and FY21, respectively, which appear to be attractive, in our view. Hence, we maintain our buy recommendation on the stock with a revised target price of Rs 740 (8 times of FY20 Ebitda)," said the brokerage.