Sanghi Industries Ltd - Q2 FY21 Result Update - YES Securities

Valuation: In our view, outlook for SNGI appears gloomy despite factoring in a bull case scenario (volume/EBITDA CAGR of 40%/30% over FY21E-FY23E) as we foresee a.) inability to fully ramp-up new capacity resulting into subdued utilization levels - at ~57% by FY23E vis-à-vis ~48% in FY20E, b.) EBITDA/te to peak out in FY21E and downward trajectory of margin profile going ahead due to higher clinker sales (factored in 1 MT clinker sale in FY23E) and c.) fragile balance sheet with peak net debt of Rs 13 bn and net debt/EBITDA at 7.3x in FY21E which should scale down to 3.8x by FY23E. Accordingly, we maintain our SELL rating with revised TP of Rs 19/share (revision in TP from Rs 16.2 to Rs 19 due to rollover) based on assigned EV/EBITDA valuation of 6x on Sep-22E - potential downside of 35%.

Key result and con-call highlights:

- Volumes for Q2 came in at 0.39 MT (est. of 0.4 MT) translating into a decline of 13.3% y/y. Company has highlighted heavy rainfalls and COVID as primary reasons for volume de-growth. On the positive side, management has mentioned about significant improvement in non-trade demand in Gujarat during October - a double digit growth trajectory.

- Pricing during Q2 witnessed softness due to monsoons, resulting into NSR decline of 4.5% sequentially which was in-line with our estimates based on channel checks. Although, pricing scenario remains the same from Sep exit to November, higher share of non-trade demand has led to marginal dilution of NSR.

- SNGI reported an EBITDA of Rs 362 mn vs. our estimate of Rs 368 mn - a marginal decline of 2% y/y. Operational performance during the quarter was in-line with our expectations. EBITDA/te for the quarter stood at Rs 929 vis-à-vis our estimate of Rs 915, witnessing an improvement of 13% y/y due to softer energy costs and tight control on fixed costs.

- Capex: Company expects to commission Kutch clinker (3.3 MTPA) and grinding unit (2 MTPA) by Q3FY21E. Expansion of Surat grinding unit of 2 MTPA continues to be on hold. Further, SNGI has entered into a tie-up with Zuari Cements for access to their Kochi terminal to make in-roads into the Kerala market.

- Balance sheet: Company expects debt to peak out at Rs 12.5-13 bn in FY21E.

- Others: OPC mix stood at 62% while Gujarat share in volumes was at 86%.

Outlook

- Having visited the Kochi terminal of Zuari and assessed the Kerala market, we remain skeptical of company's strategy to penetrate into Kerala market due to regional dominance of RAMCO and ICEM combined with limited room for demand growth.

- In our bull case scenario, we factor in volume CAGR of 40% over FY21E-FY23E including 1 MT of clinker exports in FY23E (based on company's earlier guidance). Further, we have penciled in 29% EBITDA CAGR over FY21E-FY23E with EBITDA/te declining from Rs 981 in FY21E to Rs 846 by FY23E - dilution due to higher share of clinker sales.

- However, we reckon balance sheet would remain extremely fragile as we expect peak net debt of Rs 13 bn in FY21E translating into net debt/EBITDA of 7.30x. In our bull case estimates, we expect net debt/EBITDA to gradually decline to 3.8x by FY23E.

Key Risk:

- In a scenario of SNGI takeover by a PAN India player, there can be significant upside potential as asset valuation of company is subdued currently.

Shares of SANGHI INDUSTRIES LTD. was last trading in BSE at Rs.30.8 as compared to the previous close of Rs. 30.95. The total number of shares traded during the day was 44027 in over 285 trades.

The stock hit an intraday high of Rs. 31.65 and intraday low of 30.75. The net turnover during the day was Rs. 1369773.

Source : Equity Bulls

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