Sagar Cements surges 8%, nears record high on heavy volumes

Analysts at Emkay Global believe heightened M&A activity (like the recent Sanghi and Kesoram acquisitions) has induced a state of euphoria among small/mid-size cement players

Shares of Sagar Cement hit an over two-year high of Rs 304.65 as they rallied 8 per cent on the BSE in Wednesday's intraday trade, amid heavy volumes, on expectations that capital addition will drive superior volume growth going forward. In the past three trading days, it has surged 20 per cent.

The stock of the cement company was trading at its highest level since October 2021. It had hit a record high of Rs 317 on August 17, 2021.

At 11:18 AM, Sagar Cement was trading 7 per cent higher at Rs 301.60 as compared to 0.5 per cent decline in the S&P BSE Sensex at 71,549. Trading volumes on the counter jumped more than two-fold today with a combined 3.5 million equity shares of the company changing hands on the NSE and BSE.

In the July to September quarter (Q2FY24), Sagar Cement had reported healthy operational performance with earnings before interest, taxes, depreciation, and amortisation (Ebitda) margins improving 900 bps to 10 per cent. Revenue increased by 24 per cent year-on-year and volume increased by 27 per cent for Q2FY24.

The management expects a similar margin profile during the second half of the fiscal (H2-FY24) driven in part by lower input costs, and better volume growth on account of ramp-up of Andhra cement and MP and Odisha plants. Also, the company's strategic initiatives towards increasing the share of green power, usage of electric trucks and wheel loaders and increased usage of alternative fuel, bodes well for rationalisation of operating costs over the medium to long term.

India Ratings and Research (Ind-Ra) expects the sales growth momentum to pick up in H2-FY24 on the back of demand from infrastructure projects ahead of elections, and volumes from Andhra Cements. Ind-Ra believes SCL's medium-term growth in the country's central region will be aided by the region's low-per capita cement consumption and a large rural base, indicating under-penetration, while the growth in south India is likely to be close to the pan-India average.

Meanwhile, analysts at Emkay Global Financial Services have an 'Add' rating on Sagar Cements with a target price of Rs 310 per share.

The brokerage firm believes heightened Merger & Acquisition (M&A) activity (like the recent Sanghi and Kesoram Industries acquisitions) have induced a state of euphoria among small/mid-size cement players (such stocks are trading below replacement cost of $100-110/tonne).

Sagar has increased its capacity by over 70 per cent (in the past three years) to 10.9mt, via a combination of organic and inorganic expansions. This is expected to provide superior and industry-leading volume growth (above 25 per cent CAGR) over the next few years. The company targets increasing capacity further, at 20 per cent/50 per cent by FY25/ FY30, respectively.

"Also, improving cash flow along with sale of non-core assets (likely land in Vizag) may address growth capex requirements and the concerns about high leverage (net debt: Rs 1,400 crore as of September 2023) in coming years," the analysts said in a company update.