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Sagar Cements Ltd.

BSE: 502090 Sector: Industrials
NSE: SAGCEM ISIN Code: INE229C01013
BSE LIVE 13:08 | 11 Dec 828.00 0.90
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830.00

HIGH

835.00

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NSE 13:03 | 11 Dec 824.10 -1.80
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OPEN

849.95

HIGH

849.95

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OPEN 830.00
PREVIOUS CLOSE 827.10
VOLUME 759
52-Week high 940.00
52-Week low 605.05
P/E 44.28
Mkt Cap.(Rs cr) 1,689
Buy Price 828.05
Buy Qty 9.00
Sell Price 832.95
Sell Qty 5.00
OPEN 830.00
CLOSE 827.10
VOLUME 759
52-Week high 940.00
52-Week low 605.05
P/E 44.28
Mkt Cap.(Rs cr) 1,689
Buy Price 828.05
Buy Qty 9.00
Sell Price 832.95
Sell Qty 5.00

Sagar Cements Ltd. (SAGCEM) - Director Report

Company director report

Dear Members

Your Directors are pleased to present their Thirty Sixth Annual Report together withthe audited Stand-alone and Consolidated financial statements of the Company for the yearended 31st March 2017.

Financial Results (' in Lakhs)

Particulars

Standalone As on

Consolidated As on

31-03-2017 31-03-2016 31-03-2017 31-03-2016
Revenue from Operations (Net) 62000 70811 94159 86242
Other Income 2312 2828 352 408
Total Revenue 64312 73639 94511 86650
Earnings before Interest tax Depreciation and Amortization (EBITDA) 8249 12368 11389 12720
Finance costs 3045 2915 6208 4186
Depreciation 2800 2346 4759 3472
Profit before Tax 2404 7107 422 5062
Total of tax expenses 1155 2189 814 635
Profit after Tax 1249 4918 -392 4427
Add : Profit brought forward from the previous year 39522 36856 39032 36856
Profit available for appropriation 40771 41774 38640 41283
Appropriations:
Less: Dividend - 1304 - 1304
Less: Tax on Proposed Dividend on Equity Shares - 266 - 266
Other Comprehensive Income -4 53 -23 53
Less: Additional Depreciation on account of adjustment as per Companies Act 2013 - 735 0 735
Add: Other Adjustments - - -1 1
Total Appropriations -4 2251 -23 2251
Balance carried to Balance Sheet 40767 39522 38616 39032
Earnings Per Share (Basic and Diluted) (') 6.98 28.28 -2.19 25.46

Dividend

Your Board has recommended a dividend of ' 1.50 (15%) per share on the 20400000equity shares of '10/- each. Transfer to reserves

The entire balance available in the Profit and Loss Account is retained in it as notransfer from it to reserves is contemplated. Share Capital

Pursuant to the approvals accorded by the Shareholders at their Extraordinary GeneralMeeting held on 23.11.2016 your board has allotted 611986 equity shares of ' 10/- eachat a premium of ' 790/- per shares through preferential allotment and 2400000 equityshares of '10/- each at a premium of ' 710/- per share to the Qualified InstitutionalBuyers through Qualified Institutional Placement. Your Board is thankful to the investorsfor their confidence reposed in the company and making the above allotments a success. Thefunds raised through the above issues are being utilized for their intended purposesnamely expansion of your grinding unit at Bayyavaram setting up of a coal based powerplant at your Mattampally unit and for general corporate purposes.

After the above said allotments the paid-up share capital of the company now stands at' 204000000/- divided into 20400000 equity shares of ' 10/- each.

Management Discussion Analysis

To avoid repetition in the Directors' Report and the Management Discussion and AnalysisReport the information under these reports is furnished below as a composite summary ofthe performance of the various aspects of the business of your company.

Industry Structure and Development

Cement being a basic building material and used widely in urban housing and industrialsectors and in developing infrastructure its per capita consumption is an important indexof a country's economic growth.

India is the second largest producer of cement in the world and the cement industry inIndia forms a vital part of its economy providing employment to more than a millionpeople directly and indirectly. The top 20 cement companies account for almost 70 percent of the total cement production in the country. While a total of 188 large cementplants together account for 97 per cent of the total installed capacity in the country365 small plants account for the rest. Of these large cement plants 77 plants are locatedin the Southern States alone.

This industry is expected to grow at a significant phase due to increase in thegovernment's push for large infrastructure projects leading to an incremental demand for45 million tonnes (MT) of cement in the next three to four years.

Company's performance

The Infrastructure construction and realty sectors which consume major part of thecement produced in the country which were on the path of recovery witnessed a slow-downin the later part of the year 2016-17 due to disruption caused by demonitisation.

Further speedy revival of demand for cement in Telangana and Andhra Pradesh that wasexpected following the bifurcation of the erstwhile state of Andhra Pradesh is yet toreach the level hoped for as the plans announced by the Governments in these states toboost the infrastructure activities post-bifurcation are still in the initial stages. Thisis a matter of concern for your company as these two states are its major markets. As aresult the cement industry in these states and your company in particular continues toface challenges with pricing pressure and weak demand.

When viewed in the above contexts the performance of your company on a stand-alonebasis during the year 2016-17 in terms of production sale and average net salesrealization per ton of cement is satisfactory.

1 Particulars 2016-17 2015-16
Cement Production in MTs 1521565 1517859
Cement Sales in MTs 1537237 1517112
Average Net Sales Realization per MT (' ) 3077 3174
Total Revenue ( ' In lakhs) 64312 73639

Subsidiaries Joint Ventures or Associate Companies

As you are aware in the year 2015 your company acquired the entire equity stake in BMMCements Limited which has since been re-named as Sagar Cements (R) Limited. Thiswholly-owned subsidiary has its cement plant of 1.00 Million MTs per annum capacity alongwith a coal based captive power plant of 25 MW capacity in Gudipadu Village in AnanthapurDistrict A.P.

Prior to the said acquisition this subsidiary was operating at a very low capacity dueto inter-alia outsourcing of lime stone at high cost for its cement production as itwas yet to obtain the requisite permission to extract the lime stone available in itscaptive mines. With the necessary mining permission having since been obtained the saidsubsidiary by utilizing the limestone available from its captive resources is presentlyoperating at a capacity level of around 67%.

To meet the funds requirement of this subsidiary to enable it to resume its normaloperations after its acquisition by your company and to strengthen its long term fundsrequirements your company post its acquisition of the said subsidiary extendedfinancial assistance to the extent of ' 259.01 Crores initially in the form ofinter-corporate loan and later converted a sum of ' 172.00 Crores outstanding against thesaid loan into Cumulative Redeemable Preference Shares. Apart from this your Company hasalso furnished a corporate guarantee for redemption of the debentures issued by the saidsubsidiary to the International Finance Corporation details of which have been providedin the financial statements.

The cement produced by this subsidiary is sold under the brand name "SAGAR".As this subsidiary further consolidates itself and improves upon its operations theinvestments made by your company in this subsidiary will prove to be beneficial to yourcompany.

Your Company does not have any Joint Ventures or Associate Companies.

Statement containing salient features of the financial statement of the above mentionedsubsidiary has been given in Form AOC 1 in the Annexure 1 to this report.

Grinding Unit in Bayyavaram

Demand for cement is expected to pick up at a faster rate in Odisha West Bengal and inthe Vizag region of Andhra Pradesh where the focus is likely to be more on theinvestments in infrastructure sector. The identification of Vishakhapatnam and Kakinada inAndhra Pradesh and Bhubaneswar in Odisha for development as 'smart cities' under the PrimeMinister's 'Smart Cities Mission' is expected to give further push to the said demand forcement in these regions.

In this connection you may recall that we had informed you in our previous report thatwith a view to catering to the markets in the above areas your Company was planning toacquire a grinding unit of 181500 MT capacity at Bayyavaram in Visakhapatnam District ofA.P. and to expand its capacity to 0.3 million tonnes at a total cost of ' 67 croreswhich would enable your company to transport the surplus clinker available at its plant inMattampally to Bayyavaram for grinding it into slag cement to meet the demand in the saidmarkets. Your directors are happy to inform you that the said acquisition having sincebeen completed the expansion of its capacity as planned is underway.

Opportunities and threats:

Constraints on inputs:

The cement industry is a highly energy intensive sector. Energy along with other rawmaterials mainly comprising coal and lime stone forms the most critical component in themanufacture of cement. While your company does not face any problems with respect to theavailability of limestone it attaches high priority to keep its energy cost which formsa significant portion of the input costs to the minimum. This is sought to be achievedamong other means by ensuring an optimum combination in the consumption of indigenouscoal along with imported coal which is relatively cheaper.

As you may recall we had mentioned in our previous report of your Company's proposalto set up a waste heat recovery plant at its unit in Mattampally at a cost of ' 65.23Crores. We are glad to inform you that this project started generation of power on19.06.2017 and this on attaining its full capacity of 6 MW would further contribute toyour company's efforts in reducing the energy cost.

Your directors wish to inform you that to supplement your company's efforts in theabove area your company is also setting up coal based power plant of 18 MW capacity and asolar power plant of 1 MW capacity at its plant in Mattampally at a cost of ' 99.41 Coresand ' 4.70 Crores respectively and barring unforeseen circumstances these plants will becommissioned by 31.03.2019 and 01.12.2017 respectively.

However logistics continues to be the main area of concern with the distribution costremaining a significant component in the cost structure. The railway siding projectcommissioned in the last quarter of the previous year is a significant step in optimizingthe freight cost.

Lower demand

Housing sector which accounts for 60 to 70 % of cement demand is yet to pick-up in abig way both in Telangana and Andhra Pradesh which are the major markets for yourcompany. While the initiatives by the governments like 'Smart Cities Mission' will helpthe construction real estate infrastructure and cement sectors in due course the cementindustry may have to wait for some more time to see any significant revival in demand inthese states.

In the above circumstance your company which is already serving the markets inTelangana Andhra Pradesh and in the border areas of the neighboring states needs to lookinto expanding its market into interior areas of its neighboring states. However thefreight cost involved in moving the material from its plants at Mattampally and Bayyavaramdiscourages it to reach out to such far away markets as the price of the locally producedcement would be much cheaper.

As the company cannot afford any more to ignore the growing demand for cement in itsneighboring states just because of the transportation cost involved in catering to thesemarkets apart from serving these markets from its own production wherever there is costadvantage in doing so it buys cement in bulk from other sources located in these statesand sell the same in the retail markets in those areas under the brand name 'Sagar'. It ishoped that this apart from increasing the sales turnover of the company without incurringany additional capital expenditure and in turn improving its bottom line would help it inpopularizing its brand in new areas as well as in firmly establishing it in the areaswhere it might only have a token presence at present.

Impact of entry of global players:

The Indian cement industry with its huge potential continues to attract the entry ofglobal cement majors and encourages the strengthening of production bases by existingcompanies. This may lead to a substantial part of the cement capacity being controlled bya few players. Sagar Cements proposes to meet some of the challenges posed by thisdevelopment by focusing on cost reduction and by further improving its brand imagegreater expenditure on advertising strengthening its distribution networks as well as byother customer-focused initiatives. Apart from these Sagar Cements is looking foropportunities to expand its market through strategic alliance and setting up of grindingstations wherever viable.

Future outlook

The per capita consumption of cement being very low in India there is a vast scope forgrowth in its demand on the long term. However for a real growth to happen in the cementindustry there should be an overall growth in investments in the real estate andinfrastructure sectors.

Telangana and Andhra Pradesh will continue to be the major markets for your Companynotwithstanding the plans to expand its market in other states. With the respectiveGovernments in these states rightly focusing on the development of

infrastructure along with the importance given by the Union Government for thedevelopment of National Highways Rural and Urban Roads Affordable Housing PortConnectivity Development of smart cities etc. coupled with private agencies coming upwith a slew of their infrastructure development projects demand for cement in these andtheir neighboring states is expected to see a significant growth which augurs well foryour company which with its aggressive and innovative marketing duly supported by itswell motivated marketing personnel is poised to grab the opportunity available in thisscenario.

However till such time that the above scenario becomes a reality your company mayhave to continue to face the problems like rising input and distribution costsnotwithstanding the efforts being made by your company to mitigate the same.

The Goods and Services Tax rate of 28% fixed by the Government with effect from 01stJuly 2017 which may not have major impact on the cement industry. The Company willoptimize the distribution/warehouse network under GST regime to further improve theoperational efficiency.

Therefore taking an overall view of the above your Board is cautiously optimisticabout the future outlook for your company.

Risk Management System:

The Company attaches utmost importance to the assessment of internal risks and themanagement thereof in all its dealings. Company is constantly on the lookout foridentifying opportunities to enhance its enterprise value and keeping the need to minimizethe risks associated with such efforts every proposal of significant nature is screenedand evaluated for the risks involved and then approved at different levels in theorganization before implementation.

With a view to overcoming the risk of dependence upon any particular marketing segmentor region your Company is trying to reach out to a wider section of its ultimateconsumers. As the cement industry is witnessing rapid additions to its capacity inTelangana and A.P. in order to mitigate the risk associated with it Sagar Cements whoserevenue is mainly from these sales is looking for growth opportunities in other Stateswhere infrastructure spending is set to get a boost.

The Company has adequate system to manage the financial risks of its operations. Thesystem is implemented through imposition of checks and balances on extending credit to thecustomers audits like internal audit statutory cost and secretarial audit all of whichare periodically carried out through external firms proper appraisal of major capitalexpenditure adherence to the budget norms covering all areas of its operations and byinsurance coverage for the company's facilities.

Internal Control System and its adequacy:

The Board of Directors are satisfied with the adequacy of the internal control systemin force in all major areas of operations of the Company which is supported by an ERP andcompliance management systems. The audit committee assists the board of directors inmonitoring the integrity of the financial statements reservations if any expressed bythe company's auditors including the financial cost internal and secretarial auditorsand based on their inputs the board is of the opinion that the company's internalcontrols are adequate and effective.

Human resource development and Industrial Relations

Your Company continues to enjoy cordial relationship with all its personnel at itsPlants Offices and on the field.

Your company is organizing training programmes wherever required for the employeesconcerned to improve their skill. Employees are also encouraged to participate in theseminars organized by the external agencies related to the areas of their operations.

Your company continues to focus on attracting and retaining competent personnel andproviding a holistic environment where they get opportunities to grow and realize theirfull potential. Your company is committed to providing all its employees with a healthyand safe work environment.

Sexual Harassment

Regarding the Sexual Harassment of Women at the work place (Prevention Prohibition& Redressal) Act 2013 the company has constituted an Internal Complaints Committee.No complaints were received or disposed off during the year under the above Act.

Awards and Recognitions

Your company was the recipient of the prestigious "Best Management Award" forthe second time in the year 2017 from the Government of Telangana.

Your company has already achieved ISO Certification ISO 9001:2008 for QualityManagement System Standard ISO 14001:2004 for Environmental Management System Standardand OHAS 18001:2007 for Occupational Health and Safety Management System Standard.

As the shareholders are aware your company's Laboratory at its Plant in Mattampally isthe recipient of the Accreditation by the National Accreditation Board for Testing andCalibration Laboratories (NABL) which is the sole accreditation body for testing andcalibration laboratories under the aegis of Department of Science and TechnologyGovernment of India.

Directors Responsibility Statement

Pursuant to Section 134 (5) of the Companies Act 2013 the board of directors to thebest of their knowledge and ability confirm that:

i. in the preparation of the annual accounts the applicable accounting standards havebeen followed and there are no material departures;

ii. they have selected such accounting policies and applied them consistently and madejudgments and estimates that are reasonable and prudent so as to give a true and fair viewof the state of affairs of the company at the end of the financial year and of the profitof the company for that period;

iii. they have taken proper and sufficient care for the maintenance of adequateaccounting records in accordance with the provisions of the Act for safeguarding theassets of the Company and for preventing and detecting fraud and other irregularities;

iv. they have prepared the annual accounts on a going concern basis;

v. they have laid down internal financial controls to be followed by the company andsuch internal financial controls are adequate and operating effectively;

vi. they have devised proper systems to ensure compliance with the provisions of allapplicable laws and that such systems are adequate and operating effectively.

Directors and Key Managerial Personnel

The Andhra Pradesh Industrial Development Corporation has appointed Shri P. NageshReddy as a nominee director on your Board in the place of its earlier nominee ShriK.Rajendra Prasad.

Shri Jens Van Nieuwenborgh has been appointed as an alternate director to ShriJohn-Eric Fernand Pascal Cesar Bertrand

In accordance with the provisions of Section 152 of the Companies Act 2013Shri.S.Sreekanth Reddy and Smt.S.Rachana will be retiring by rotation at the ensuingAnnual General Meeting and being eligible offer themselves for re-appointment.Accordingly the resolutions seeking the approval of the members for the saidre-appointments have been incorporated in the notice of the annual general meeting of thecompany.

Excepting Mrs. S.Rachana who is a director in Panchavati Polyfibres Limited andR.V.Consulting Services Private Limited whose transactions with the company have beenreported under the related parties disclosure under notes to the accounts none of theother non-executive directors has had any pecuniary relationship or transactions with thecompany other than the receipt of sitting fee for the meetings of the Board andCommittees thereof attended by them.

Independent Directors Declaration

The company has received the necessary declaration from each Independent Director inaccordance with Section 149 (7) of the Companies Act 2013 that he meets the criteria ofindependence as laid out in sub-section (6) of Section 149 of the Companies Act 2013.

Number of meetings of the board

Nine (9) meetings of the board were held during the year 2016-17. Details of thesemeetings have been given in the corporate governance report which forms part of theAnnual Report.

Policy on directors' appointment and remuneration and other details

The company's policy on directors' appointment and remuneration and other mattersprovided in Section 178 (3) of the Act have been disclosed in the Corporate GovernanceReport.

Under Section 178 (3) of the Companies Act 2013 the Nomination and RemunerationCommittee of the board has adopted a policy for nomination remuneration and other relatedmatters for directors and senior management personnel. A gist of the policy is availablein the Corporate Governance Report.

Board evaluation

The Board of directors have carried out an evaluation of its own performance and of itscommittees as well as its individual directors on the basis of criteria such ascomposition of the board / committee structure effectiveness its process informationand functioning etc.

Auditors

M/s. Deloitte Haskins & Sells Chartered Accountants (FR No.008072S) were appointedas Statutory Auditors of the company by the Shareholders at their 34th AnnualGeneral Meeting held on 23rd September 2015 to hold office from the conclusionof the said Annual General Meeting till the conclusion of the 39th AnnualGeneral Meeting subject to ratification of the said appointment by the shareholders atevery Annual General Meeting. Accordingly an appropriate proposal is being placed beforethe shareholders as part of the Notice of the ensuing Annual General Meeting seeking theirrequired ratification.