MOSL: SANGHI INDUSTRIES (INITIATING COVERAGE)-Ready for the next leap-Diversification into new markets to bring in scale & margin expansion
​Sanghi Industries (initiating coverage): Ready for the next leap; Diversification into new markets to bring in scale and margin expansion
(SNGI IN, Mkt Cap USD0.4b, CMP INR127, TP INR157, 23% Upside, Buy)
- Sanghi Industries Limited (SIL) is a Gujarat-based cement company, with capacity of 4.1mt. Around ~90% of its volumes are sold in Gujarat. An integrated cement unit, SIL owns a 63MW captive power plant and a port. SIL is one of the lowest cost cement producers due to its quality limestone, locational advantage and strong integration across the manufacturing value chain (SIL’s cost/t of INR2,766 v/s industry average of INR3,603).
- SIL’s strength lies in its access to 1b tonne of quality marine limestone reserves, which should allow it to sustainably add capacity over the next 15 years.
- We expect SIL’s margins to expand by 8.4pp over FY17-20, led by its three-pronged strategy: (i) commissioning of a waste heat recovery system (WHRS), (ii) focusing more on the coastal mode of transportation by way of acquisition of ships and (iii) achieving a favorable revenue mix with higher proportion of PPC.
- In our view, SIL is a strong candidate for a re-rating, led by (i) expected increase in its capacity from 4.1mt now to 8.2mt over the next 30 months and (ii) anticipated scale benefits led by diversification into new higher-priced markets.
- We expect EBITDA CAGR of 33% over FY17-20, with improved pricing and positive operating leverage leading to 26% CAGR in EBITDA/t. This is likely to drive PAT CAGR of 61% to INR2.63b over FY17-20. We expect RoE to increase by 11pp to 16.8% in FY20, led by a sharp uptick in profitability.
- We initiate coverage on SIL with a Buy rating and a target price of INR157 (23% upside; valuing its present capacity of 4.1mt at USD120 EV/tonne; incremental capacity of 4.1mt likely to be added by FY20 at USD78/t at a 35% discount to replacement cost of USD120/t).
Sanghi Industries Limited is an India-based company engaged in the manufacturing and sale of cement and clinker. The Company manufactures and markets cement and cement products in domestic and export markets. It offers products, including Ordinary Portland Cement (OPC) and Portland Pozzolana Cement (PPC). The Company offers cement under the brand name Sanghi Cement. The Company produces 53 Grade OPC and PPC Cement. It provides Shakti Rath service, which is a mobile concrete testing laboratory having all the necessary equipment and facilities required for onsite concrete testing. The Company operates over 40 Shakti Raths in Gujarat. The Company has established approximately 45 consumer care centers at the cities and towns of Gujarat, Rajasthan and Kerala. The Company's manufacturing facilities are located at Sanghipuram, Abdasa taluka of Kutch district in Gujarat. Its manufacturing plant has production capacity of approximately 4.1 million tons cement per annum.
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