MOSL: SPOTLIGHT — SAGAR CEMENT (Not Rated)-Well placed to capture growth in AP/Telangana-Cost efficiencies and scaling of capacity to drive profits

​​SPOTLIGHT — SAGAR CEMENT: Well placed to capture growth in AP/Telangana; Cost efficiencies and scaling of capacity to drive profits

(SGC IN, Mkt Cap USD0.3b, CMP INR872, NOT RATED)

• Sagar Cements (SGC) is a Hyderabad-based cement company, primarily operating in the southern market of India (~78% of overall volumes). The company’s key markets are AP/Telangana (~46% of volumes), Tamil Nadu (~16%) and Karnataka (~16%). To diversify geographically, SGC is likely to increase its capacity from 4.3mt currently to ~5.8mt by FY20.
  
• Ready to capitalize on available opportunities
  
• SGC is well placed to capitalize on strong opportunities in the underlying markets of AP/Telangana, where demand has grown in excess of 20% YoY over the past 12-15 months. We expect cement demand in AP/Telangana to grow at 12-15% over the next two years, driven by the government’s push toward infrastructure development and creation of a new state capital of Amravati (Andhra Pradesh). This is likely to result in strong volume growth for SGC.
  
• Diversification and low-cost capacity addition to bring in stability
  
• In an attempt to diversify geographically, SGC is likely to increase capacity by ~35% over FY17-19 at a minimal capex of INR2b (USD20/t) by way of debottlenecking and brownfield expansion. With capacity ramp-up in Bayyavaram, SGC is likely to increase its presence in east, which has seen strong growth. Low-cost capex will meaningfully improve its return ratios, in our view.