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Sagar Cements 3QFY13 results update

Contributed by Nirmal Bang

Sagar Cements’ (SCL) 3QFY13 operating performance was below our expectations, with EBITDA at Rs53.6mn versus our estimate of Rs135.7mn, primarily due to higher cost inflation than expectations due to the rise in grid power costs coupled with non-availability of continuous power supply in Andhra Pradesh (AP) and higher other expenses. Net profit at Rs40.7mn was above our estimate, primarily driven by other operating income of Rs138mn (up 29.5% YoY). Net sales declined 13.9% YoY to Rs1.2bn (broadly in line with our estimate) due to lower sales volume following poor demand in AP coupled with the fall in realisation. We expect cement demand to improve in the coming months, leading to a rise in cement prices and overall performance of the company. We have retained our Buy rating on the stock with a target price of Rs345.

Net sales broadly in line with estimate: SCL reported a decline in net sales by 13.9% to Rs1.2bn, (in line with our estimate) due to lower sales volume following poor demand in AP coupled with the fall in realisation. Cement sales volume declined 10% YoY to 0.35mt and realisation fell 3.5% YoY to Rs3,525/tn.

Operating performance below expectations: The company posted decline in EBITDA by 82.4% to Rs53.6mn (below our estimate of Rs135.7mn) due to cost inflation (power costs, freight charges), decline in realisation and negative operating leverage. Power costs were higher due to the rise in grid power tariff. However, fuel costs declined, led by more usage of domestic coal. Freight costs increased by 7.8% to Rs679/tn due to the rise in lead distance from the plant and higher diesel prices. Other expenses increased 39.2% to Rs781/tn due to negative operating leverage. Overall expenses were up by Rs272/tn while there was decline in realisation by Rs126/tn.

Net profit above estimate led by other operating income: The company posted a net profit of Rs40.7mn, against our expectation of a net loss of Rs4mn, led by a 30% increase in other operating income to Rs139.1mn due to the AP government’s industrial policy in respect of incentives on sales tax and power consumption.

Commercial production starts at Vicat-Sagar joint venture (JV): The JV has started commercial production of cement from its recently commissioned 2.75mt plant in Karnataka. The plant is expected to operate at 50% of its capacity in the first year of its operations and tap markets in Maharashtra (60%), Karnataka (20%) and AP (20%).

Outlook: We have retained our earnings estimates for FY13, as we believe the shortfall in operating performance would be made good in 4QFY13 led by likely improvement in demand and thereby a rise in cement prices. Cement prices have already gone up to Rs230/bag from a bottom of Rs210/bag and are expected to touch ~Rs275/bag in March 2013. We believe the improvement in demand and the rise in cement prices would improve the company’s performance in the coming quarters and the Vicat-SagarJV starting commercial operations would lead to a re-rating of its investment value. We have retained our Buy rating on SCL with a TP of Rs345.