Sanghi Inds Ltd. - Post Result

·        Net revenue declined by 19% y-o-y and 9% q-o-q to INR 247 crs. Net revenue declined significantly due to lower realization per tonne of cement during demonetization and it stretched for next couple of months.
·        EBITDA declined 31% y-o-y but it improved 1% q-o-q due to marginal improvement in cost sequentially.
·       Sanghi has reported INR 26crs PAT against INR 3crs loss in Q4FY16 and INR 5crs PAT in Q3FY17. The higher PAT is attributable to INR 9.68crs of tax credit. The adjusted PAT in Q4FY17 was INR 17crs.
·       Sanghis capacity expansion got delayed by couple of quarters due to lack of funds. Management is confident of getting financial closure in next couple of quarters.
·       Sanghi is currently trading at 8.1x FY18E and 6.2x FY19E EV/EBITDA and an EV/tonne of USD 75.

Sanghi Industries Limited reported a mixed set of numbers in its Q4FY17 financial number. Net revenue decreased due to lower realisation and lower clinker sales volume while net profit remained largley in-line with estimate. Net revenue declined by 22% y-o-y and 9% q-o-q to INR 247 crs due to 85% y-o-y declined clinker sales volume to 34k tonne and 10% decreased in blended realisation to INR 3,150 per tonne. The lower realisation is attributable to demonetization which has stretched for next couple of months. The lower clinker sales volume is because of an expansion of grinding capacity. Sanghi reported 44% decline in EBITDA to INR 42crs but it remained flat sequentially. Company reported 158bps q-o-q expansion in EBITDA while it declined 660bps y-o-y to 17%. In Q4FY17, Sanghi has registered INR 541 per tonne of EBITDA as against INR 504 in Q3FY17 and INR 828 in Q4FY16. Sanghi reported INR 26crs of PAT against INR 3crs loss in Q4FY16 and INR 5crs PAT in Q3FY17. With an adjustment of tax credit of INR 9.68crs, Company reported INR 17crs of PAT.      

Subdued clinker sales dented the net revenue
Sanghi industries limited has reported 10% y-o-y and 32% q-o-q growth in cement sales volume to 7.42lac tonne as against 6.74lac tonne in Q4FY16 and 5.64lac tonne in Q3FY17. As per internal policy, Company decided to reduce the clinker sales because of an expansion of 1.2mn tonne of grinding plant at existing site last year. Consequently, clinker sales reduced 85% y-o-y and 87% q-o-q to 34k tonne in Q4FY17. RMC sales improved sequentially, however it declined 29% y-o-y to 0.07lac tonne. The average clinker sale was 11% of total sales volume in 13 quarters. The average realization of clinker is USD 30 per tonne, significantly lower than cement realization. We believe the increasing proportion of cement sales in total volume will increase the realization per tonne.

The lower operating cost protected EBITDA per tonne
The operating cost remained under control which has protected EBITDA per tonne sequentially. The operating cost per tonne of cement production was INR 2,609 as against INR 2,727 in Q3FY17 and 2,654 in Q4FY16. Consequently, Sanghi has reported EBITDA per tonne of INR INR 541 as compared to INR 504/tonne in Q3FY17 and INR 828/tonne in Q4FY16. We believe the cost per tonne of cement production to decline a) company has put conveyor belt for limestone transportation and b) currently Sanghi uses 40% Lignite for power plant and the replacement of VAT & Excise from GST will reduce the tax rate from 28% to 5%  to Lignite producer which is expected to pass on to end consumer. We believe per tonne of cement production cost to moderate going forward.

Capex
Sanghi’s capacity expansion got delayed by couple of quarters due to lack of funds. Management is confident of getting financial closure in next couple of quarters. The total capital outlay for the next leg of expansion is INR 1,250crs. The next leg of capex entails 4.1mt grinding units, 3.3mt clinker capacity and a 63MW power project, which will take the company’s total capacity of grinding to 8.1mt, clinker to 6.6mt and power to 126MW.

Valuation
Sanghi is currently trading at 8.1x FY18E and 6.2x FY19E EV/EBITDA and an EV/tonne of USD 75. We believe, Sanghi has potential to trade at higher multiple from current levels led by virtue of being a low cost producer and securing a long term contact for raw material near to its plant.

I would say it still has a multibagger potential over a 3-5-7 year period.




Excerpts from Edelweiss