Sagar Cement volume ramp-up faces near-term cost pressure despite efficiency initiatives

Investment View and Key Monitorable

ICICI Direct identifies cost savings as the principal monitorable for Sagar Cement. The broker downgraded the stock to HOLD with a target price of Rs 185, citing below-industry profitability and elevated leverage as constraints on valuation re-rating.

Q1FY27 Financial Performance

Sagar Cement reported operating revenue of Rs 706.1 crore in Q1FY27, up 5.3 per cent year-on-year but down 10.3 per cent quarter-on-quarter. Volume increased 12.5 per cent year-on-year, while realisation declined 6.4 per cent, limiting revenue growth. Total cost per tonne rose 2.5 per cent year-on-year due to higher raw-material, power and fuel, and other costs.

Capacity Footprint and Volume Growth

Sagar Cement is a south-based cement producer with 11 million tonnes per annum of cement capacity. Andhra Pradesh accounts for about 48 per cent of capacity, followed by Telangana at about 29 per cent, Odisha at about 14 per cent and Madhya Pradesh at about 10 per cent.

ICICI Direct expects improving utilisation, including further ramp-up at Andhra Cements, to support volume growth in FY27E and FY28E. Andhra Cements operated at around 41 per cent utilisation during the quarter. Management said utilisation had reached around 50 per cent and targeted about 60 per cent by end-FY27, with 60-70 per cent expected over the medium term.

Management retained its guidance for about 15 per cent volume growth to 7 million tonnes in FY27E and double-digit growth in FY28E. ICICI Direct estimates volume to grow at about 13 per cent CAGR over FY26-FY28E, reaching 7.8 million tonnes in FY28E.

The company is expanding capacity to 12 million tonnes per annum by FY28E through 0.75 million tonnes at Dachepalli, expected by Q3FY27, and 0.25 million tonnes at Gudipadu, expected in FY28E.

Demand, Pricing and Cost Outlook

Management expects South India cement demand to grow 8-10 per cent in FY27, supported by Amaravati development, Telangana's housing scheme and stronger private construction. It expects pricing to remain broadly stable, but sees operating costs rising by about Rs 100 per tonne in FY27E. Ongoing efficiency initiatives are expected to offset this inflation.

Q2FY27E may face temporary cost pressure from planned maintenance shutdowns at Mattampally and Jeerabad, along with clinker inventory-cost adjustments. Management expects the impact to reverse in H2FY27.

Efficiency and Sustainability Initiatives

• Gudipadu waste-heat recovery is expected to generate consolidated savings of about Rs 25 per tonne.
• Jeerabad savings could be about Rs 125 per tonne.
• The company aims to increase its green-power share to 50 per cent from 22 per cent by FY30.
• The company aims to raise its TSR share to 25 per cent from 2.39 per cent by FY30.

Profitability Recovery and Valuation

ICICI Direct expects profitability to recover from H2FY27E through improved realisations, ramp-up at Andhra Cements and other units, operational efficiencies and operating leverage.

The FY27E EBITDA per tonne estimate of Rs 521 is within management's guidance of Rs 500-550 per tonne. However, the broker cut its FY27E and FY28E EBITDA estimates by 17 per cent and 12 per cent respectively to reflect higher costs.

The target price of Rs 185 is based on a valuation of 7 times FY28E EV/EBITDA, plus Rs 27 per share for the 107-acre Vizag land. FY28E net debt to EBITDA is estimated at 3 times, which, together with below-industry profitability, limits the scope for a valuation re-rating.

Key Risks

• Slower-than-expected cement demand.
• Delays in capacity expansion.
• Higher commodity prices.
• Intense competition.