Capacity addition to drive volume growth for Sagar Cements: Report

Shares of Sagar Cements zoomed 12 per cent on the first trading session of 2024, January 1. Notably, the shares have managed to surge over 10.50 per cent in the first two trading sessions of 2024. This upswing is attributed to increased merger and acquisition (M&A) activities within the cement industry, notably exemplified by recent acquisitions involving Sanghi and Kesoram Industries. 

The prevailing sentiment among small to mid-size cement players, who are trading below the replacement cost of $100-110 per tonne, appears to be one of excitement.

Over the past three years, Sagar Cements has massively expanded its capacity by over 70 per cent to 10.9 million tonnes through a combination of organic and inorganic expansions. This strategic move positions the company for superior and industry-leading volume growth, anticipating a compound annual growth rate (CAGR) of over 25 per cent in the coming years, according to brokerage firm Emkay. 

Sagar Cements has set ambitious targets to further increase its capacity by 20 per cent and 50 per cent by FY25 and FY30, respectively. The company aims to address growth capital expenditure concerns and manage high leverage by improving cash flow and potentially selling non-core assets, such as land in Vizag.

The company’s capacity expansion has been a key driver of its growth, with a 7 per cent CAGR over the last decade and a recent increase to 5.8 million tonnes in FY21 through organic and inorganic means, the brokerage firm noted. 

Notably, the company added 43 per cent capacity in Q3FY22, establishing a 1 million tonne integrated plant in Madhya Pradesh and a 1.5 million tonne split grinding unit in Jajpur, Odisha. The acquisition of Andhra Cements in February 2023, with a 2.6 million tonne cement capacity (0.8 million tonnes likely to be discontinued), further supports the company's growth trajectory.

Emkay suggests that Sagar Cements is well-positioned for superior and industry-leading volume growth, targetting over 25 per cent CAGR in the coming years. The management aims to reach a capacity of 15 million tonnes by FY30, maintaining its capacity market share over the medium term.

Despite an increase in net debt to Rs 1,400 crore as of September 2023, largely fuelled by growth capital expenditure, the company is expected to see a peak in net debt in FY24E. 

The company anticipates a decline in net debt-to-EBITDA from around 4 times in FY24 to 1.8 times by FY26, supported by improving profitability and cash flow. The potential sale of non-core assets, like the Vizag land, could further accelerate the net debt reduction plan.

The ongoing consolidation trend in the cement industry is seen as a catalyst for a potential re-rating of Sagar Cements' stock. The recent M&A activities, combined with the anticipation of more cement capacity changing hands in the next few years, adds to the positive outlook for the company.

Emkay recommends an "Add" rating on the stock, with a target price of Rs 310 per share, based on a 10 times valuation of December 2025 estimated enterprise value to earnings (EV/E).