HDFC Securities Institutional Research report suggests strong delivery for the cement manufacturer
Sanghi Industries Limited is the flagship company of the Ravi Sanghi Group dealing in the production and distribution of cement under the brand name Sanghi Cementand the industries has emerged as a major cement player in Western India. Sanghi Cement is produced at one of the world's largest single stream cement plant, Kutch, with a per annum capacity of 4.1 million tones.
The plant is fully automatic with state-of-the-art technology from Fuller International, USA and has the capacity of 3.0 mtpa. This fully integrated plant includes a 63MW captive thermal power plant, all weather captive port, one of the largest limestone reserves and two sea terminals – in Gujarat and near Mumbai. Its two sea terminals enable it to undertake coastal distribution at a cost which is significantly lower than that of transporting cement by road or rail. The introduction of two ships should further improve logistics’ layout, given the captive terminals are at Navlakhi and Dharamtar.
Sanghi is a price and quality leader in the growing market of Western India, with a strong distribution network. It is one of the top three players in Gujarat and is now increasing its presence in Maharashtra and Rajasthan. The company is close to the exports market and with its own captive port, it is well placed to cater exports demand. It is the only Indian cement company to achieve Export House status in the first eight months of commencement of operations.
The company has a vision to be a large scale, top quality cement manufacturer at lowest cost and most efficient distribution. It produces superior quality 53 Grade Ordinary Portland Cement (OPC) and Portland Pozzolana Cement (PPC) and has revolutionised the way cement is produced and sold in India. It is the first plant in India to install cross belt analyzer for micro analysis of limestone and have 100 per cent robotic control systems to ensure consistent superior strength and quality of cement and operations.
Sanghi Industries witnessed a strong jump in realisations – 15.0 per cent year on year basis to Rs 4,325/t. This improvement in realisations is driving the beat on EBITDA Rs 994/t, 10.5 per cent YoY. The cement-major remains structurally well-placed to produce cement at low costs.
Costs and then more Costs!
Sanghi Industries witnessed unexpectedly sharp jump in power and fuel (P&F) costs, despite a broadly similar fuel mix comprising of more than 75 per cent lignite, likely driven by inventory accumulation, which booked Rs 9.5 crore for the first quarter of fiscal 2018.
Waste Heat Recovery Systems (WHRS), which is expected in the third quarter of fiscal 2018 and the lower lignite prices applicable from July 2017, should help decrease the P&F costs in the near future.
After remaining low for two quarters, other operating expenses, mainly overheads, reverted to the second quarter of 2017 run-rate. This along with P&F costs drove operational expenses higher.
During the quarter, pricing gain of 15 per cent YoY was offset largely by hardening costs of 16.4 per cent. Even after excluding the freight costs, costs were sharply higher by 15.5 per cent YoY driven by P&F costs and overheads hardening. Implied pricing of Rs 270-280 per bag was in-line with Gujarat pricing.
Interest costs too slipped back to a normal run-rate on account of Indian Accounting Standard (Ind-AS) adjustments in the fourth quarter of 2017, and this is likely to be the run-rate for fiscal 2018 as well.
Near-term outlook
The prices broadly remain the same in Gujarat after adjusting for GST. The industries are expected to benefit from lower lignite prices as taxes go down under GST. However, demand may be tepid, given strong monsoon and floods in Gujarat. The elections towards the end of the year should spur demand in the post-monsoon season.
There has been marginal reduction in EBITDA estimates for fiscal 2018 at 11.1 per cent on account of lower volume assumptions whereas, the estimates for 2019 are largely unchanged and the earnings-based valuations remain inexpensive.