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Sagar Cements reported a top line of Rs 61.2 crore and earnings before interest, taxes, depreciation and amortisation (EBITDA) of Rs 16 crore coupled with an interest cover of 18 for October-December 2007. Based on a market capitalisation of Rs 560 crore in the last week of March 2008, the company enjoys a discounting of 14 for 2007-8 and around 7 for 2008-9.
But the past is no index why this stock is being plugged. It is the future that holds the key for this company. This is why: prior to 2003, Sagar suffered from an inability to cover its conversion cost with market realisations. The company took a momentous decision; it pulled down the shutters, went back to the drawing board, enhanced capacity at a low capital cost and emerged as a credible 0.6 million tonnes per annum (TPA) cement manufacturer which made some money when cement prices hardened.
Sagar has now embarked on another challenging restructuring—to enhance capacity to 2.5 million TPA starting June 2008. To what extent will this expansion enable Sagar to rewire its DNA?
Look at the numbers:
• The prevailing cost per installed tonne of grinding in the cement industry is around $60-75; Sagar expects to complete it for $35 through aggressive negotiation, utilities leverage and equipment reuse
• Sagar has a cement plant consultancy, which is helping it to disaggregate plant modules, buy competitively and aggregate them without compromising quality or operational efficiency
• Considering that Sagar has already done this for a number of cement companies, most of the parameters are no longer challenging for the company including 75 units of power per tonne of cement manufactured, ranking favourably with the industry’s best standard. Its loading of nearly seven tonnes per cubic metre of kiln capacity is probably among the best benchmark in the world
• The incremental 1.9 million TPA of cement capacity is reportedly being commissioned for Rs 300 crore, a third of the cost being incurred by industry competitors
• Despite this expansion, the company’s debt-equity ratio is a creditable 1.25 following financial closure
What makes Sagar interesting is that its fully diluted equity will be no more than Rs 14 crore after the 2.5 million TPA have gone on stream at the end of the first quarter of 2008-9.
Perhaps it is this projected equitycapacity ratio as well as strong implementation skills that Blackstone evaluated when it decided to acquire shares in the company at Rs 190 each when the prevailing market price was Rs 70 a share.
There is another point: the Sagar management indicates aggressive expansions after it has successfully commissioned its next phase, expecting to emerge as a 10-million TPA company in the next few years without bleeding its equity beyond Rs 20 crore.
Should the company keep to its implementation schedule, this is one company whose market capitalisation is probably below its projected EBITDA a few years down the road.
Patherya heads Trisys, an annual reports consultancy. His column identifies stocks that are not in the limelight He can be reached at mudar@trisyscom.com.
