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Sector: Cement
Sanghi Industries
Expansion into
high-priced markets
Reserves in
proximity
Low cost s on te
cu ou
manufactoring Fo tal r
as
co
Owned ports
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Sanghi Industries
26 December 2017 2
Initiating Coverage |Sanghi Industries
Sector: Cement
Sanghi Industries
BSE Sensex S&P CNX
33,940 10,493
CMP: INR127 TP: INR157(+23%) Buy
26 December 2017 3
Sanghi Industries
Stock Performance (1-year) This is likely to result in savings of INR150-170m post stabilization. The other
initiative of acquiring two ships will likely lead to more use of the cost-efficient
coastal route for transportation. Additionally, SIL is likely to increase its
proportion of PPC from 35% now to ~50% over the next 18-24 months, for
which it has installed fly ash silo.
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Sanghi Industries
Exhibit 2: SIL’s cement production cost has remained lower than industry average over the
years
Total cement production cost for MOSL Universe (INR/t)
Total cement production cost for Sanghi (INR/t)
Exhibit 3: Even in FY17, SIL was at par with Shree in terms of being the lowest cost producer
ACC ICEM JKCE UTCEM BCORP DBEL ACEM TRCL JKLC ORCMNT SIL SRCM
Source: Company, MOSL
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Sanghi Industries
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Sanghi Industries
The company enjoys significant competitive edge in terms of lower RM cost, which
is derived from:
1) Limestone mine at close proximity to clinker unit
2) Availability of limestone by way of surface mining
3) Abundant availability of limestone at depth of ~30 metres, which reduces cost of
mining; peers have to go as deep as 70 meters to extract limestone of good
quality
4) Tie-up for flyash at a distance of 160km through UMPP at Mundra, which
provides freight cost advantages
Exhibit 6: SIL’s raw material cost has remained significantly lower than industry average
over the years
Raw material cost for MOSL universe (INR/t) Raw material cost for Sanghi (INR/t)
957
879 841 822 822 802 787
708
493
384
305 273
JKLC JKCE DBEL BCORP TRCL UTCEM ICEM ACC ORCMNT ACEM SRCM SIL
Source: Company, MOSL
Limestone reserve is at a distance of ~3km from the clinker unit, which provides
a huge freight cost advantage to SIL. Additionally, the company has built a
conveyor belt (at a cost of INR150m) to transport limestone from the mine to
the clinker unit. This is expected to ensure savings of INR10-15/t in the form of
lower freight cost.
As limestone is available at the surface of the mine, it is extracted by way of
surface mining, which is far cheaper than conventional methods of mining
(involve procedures like blasting). Notably, limestone is extracted at a depth of
30 meters, as against conventional depth of 70 meters.
Other additives like laterite, clay and silica (which form ~15% of overall RM
costs) are also available at close proximity of ~10-15km from the limestone
mines.
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Sanghi Industries
Power & fuel cost per tonne is lower for SIL, as:
Power required for cement operations is procured from its low-cost captive unit.
Thermal power plant is multi-fuel, with the flexibility of using lowest-cost fuel.
Addition of WHRS will further reduce power cost.
Availability of lignite offers a competitive edge, especially when petcoke prices rise
sharply.
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Sanghi Industries
Exhibit 8: Comparison of SIL’s power & fuel cost with average MOSL cement universe
Power and Fuel cost for MOSL universe (INR/t) Power and Fuel cost for Sanghi (INR/t)
1,265
1,127
1,054
925
768 799
Exhibit 9: SIL’s power & fuel cost is around industry average and shall further improve
post commissioning of WHRS
FY17 power and fuel cost/t for Sanghi and MOSL cement universe (INR/t)
1,061 1,017 965 948
799 793 783
712 650 620
501
ICEM
DBEL
ORCMNT
JKCE
BCORP
UTCEM
SRCM
SIL
TRCL
JKLC
ACC
Very High - 8200 Kcal/Kg VERY LOW - 3000 to 3200 LOW - varies from 4000 to 6200
Gross Calorific Value (GCV)
guaranteed Kcal/Kg, approx. Kcal/Kg approx.
Quality Consistent WILL VARY - as natural product WILL VARY - as natural product
Very Low - nearly 2 - 3 times HIGH - approx. 2 3 times higher HIGH TO MEDIUM - approx. 1.5
Material handling
lesser than lignite than pet coke - 2 times higher than pet coke
Very Low - approx. 20 to 25% VERY HIGH - most of the VERY HIGH - most of the
Grinding requirement
material needs grinding material needs grinding material needs grinding
HIGH - has high moisture - does HIGH - has high moisture - does
LOW - very low moisture - does
Moisture content suck moisture from land and suck moisture from land and
not suck moisture by self
atmosphere atmosphere
LOW - low initial burning loss; HIGH - high initial burning loss; HIGH - high initial burning loss;
Volatile matters also is not self-burning in open gets self-burning in heavy gets self-burning in heavy
space due to heavy sunlight sunlight sunlight
Source: www.flamingotraders.in
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Sanghi Industries
SIL is also adding a waste heat recovery system (WHRS) with capacity of 15MW
at estimated capex of INR1.25b (likely to get commissioned by end-FY18), which
should reduce its power cost further. Cost of power generation by WHRS
(~INR0.5/unit) is ~80% lower than cost of power generated from the thermal
power plant (~INR3.5/unit).
SIL would have excess power post the commissioning of WHRS, which would be
sold to the grid as it has connectivity to the grid line.
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Sanghi Industries
SIL incurs higher freight cost than peers as it caters to the higher-lead-distance
markets of Ahmedabad and Surat by way of road. The lead distances for
Ahmedabad and Surat are ~500km and ~750km, respectively, much higher than
industry average of ~400-500km, as limestone mines are located quite far from
the focus markets. However, it recently commissioned two new coast terminals
in Navlakhi and Mumbai, which will be utilized to cater to the Rajkot and
Mumbai markets, respectively, by way of coast, thereby likely reducing freight
cost per tonne going forward.
Additionally, the company has created export markets for both clinker and
cement by using the coastal mode of transportation, thereby benefiting from
lower freight cost and positive operating leverage. SIL has also created a decent
export market for itself in the Middle East and Sri Lanka.
In our view, the proportion of sales from the higher-lead-distance (road)
Ahmedabad and Surat markets has peaked and should structurally decline. This
would reduce overall freight cost per tonne for the company.
Exhibit 13: Average freight cost for MOSL universe and SIL
Freight cost for MOSL universe (INR/t) Freight cost for Sanghi (INR/t)
1,472 1,404
1,143 1,149 1,163 1,153
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Sanghi Industries
Exhibit 15: Lead distances for Ahmedabad and Surat higher than industry
26 December 2017 12
Sanghi Industries
Navlakhi terminal
The terminal has been constructed (at a cost of INR150m) with a strategy of
selling cement volumes to Rajkot and nearby markets at efficient freight cost.
Ramp-up of the terminal should result in lower freight cost.
26 December 2017 13
Sanghi Industries
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Sanghi Industries
Formation of mine for SIL in the Kutch limestone cluster due to receding sea levels has
left very good quality of soft marine limestone.
Limestone is available at the surface, which can be extracted through surface mining,
leading to much lower cost of extraction for SIL (compared to peers, which use the
relatively expensive conventional techniques of blasting).
The limestone reserve size is ~1b tonne, which can support operations at 2x current
capacity for more than 100 years of operations.
The recent bidding of limestone reserve happened at a premium. This provides
existing players like SIL with access to large limestone reserves with a distinctive
advantage over new players acquiring mines at a higher price.
High calcium content in limestone further reduces RM cost due to reduced levels of
overburden.
SIL’s limestone mine was formed after the sea receded from the limestone belt.
The company now possesses soft marine limestone, which is of very good
quality with high calcium content.
The limestone can be extracted by way of surface mining, as against the
relatively expensive blasting technique.
26 December 2017 15
Sanghi Industries
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Sanghi Industries
The western region is likely to witness healthy demand growth over FY17-20, led by
infrastructure spends in Gujarat and Maharashtra.
Utilization improvement for the region is likely to be healthy over the next three
years, led by better demand and minimal capacity addition.
SIL is likely to see significant market share gains in the region, led by its target to
double capacity over the coming few years.
The company’s market mix is likely to turn favorable, driven by higher sales from the
better-priced markets.
-8%
We expect demand from the western region to grow at a CAGR of ~8% over FY17-
FY20, led by a pick-up in infrastructure activity (on commencement of various
infrastructure projects) and rural housing (on good monsoon) in Maharashtra
(witnessed healthy volume growth for April-June quarter).
Demand from the Gujarat market is also likely to be healthy on account of higher
infrastructure activity (on pre-election spend). While there has been some
demonetization-led impact on the real estate market in Gujarat, we believe the
aggressive launch of affordable housing projects will partially compensate for the
loss of demand.
Exhibit 24: Infrastructure projects in Mumbai
Infrastructure projects in Mumbai Investment planned in INR Bn.
Mumbai Coastal Road project 130
Mumbai Trans-Harbor Link 180
33.5-km Colaba-Bandra-Seepz Metro link 231
Three new Metro lines under MMRDA 21
Mumbai Trans Harbor Link from Sewri to Nhava Sheva 10
Navi Mumbai Airport 145
Source: Vibrantgujarat
26 December 2017 17
Sanghi Industries
Source: vibrantgujarat
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Sanghi Industries
We expect pricing power for the region to be healthy going forward, led by
sustained improvement in the utilization levels over the next 2-3 years.
48 50 52 52 53 55 58 60 62 67
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Source: Company, MOSL
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Sanghi Industries
Exhibit 28: Prices stable across most regions (prices in INR/bag) in November 2017
313
310
307
305
305
303
302
302
300
299
297
296
295
293
292
290
289
288
288
287
287
285
284
283
282
282
281
281
281
281
281
280
279
276
274
268
North Average Prices East Average Prices West Average Prices South Average Prices Central Average National Average
Prices Prices
Source: Company, MOSL
Exhibit 29: Prices in west decreased by 1%MoM in November 2017 (prices in INR/bag)
By doubling its capacity over the next 30 months, the company is likely to expand its
capacity share from ~15% to ~26%; other players are unlikely to add meaningful
capacity in the region.
Others, 19%
Ultratech, 45%
Sanghi, 15%
Ambuja, 21%
26 December 2017 20
Sanghi Industries
Maharashtra, 7%
Others, 4%
Gujarat, 89%
Exhibit 32: PPC mix to change from current 35%... Exhibit 33: …to 50% resulting in better margins
Projected product mix
Current product mix
PPC
35% OPC PPC
50% 50%
OPC
65%
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Sanghi Industries
SIL plans to double its capacity from present levels of 4.1mt to 8.2mt at estimated
incremental capex of INR12b by FY20. This translates into additional capacity being
created at USD45/t, which is at a discount to the cost of creating an integrated cement
plant. Hence, the RoCE profile of new investment will be significantly higher, raising
the overall RoCE profile of SIL.
Profitability of new capacity to be significantly higher compared to present capacity, with:
Higher exposure to the better-priced markets of Mumbai and Kerala.
Greater proportion of blended cement from new capacity, where EBITDA/t is
higher by almost INR200 due to lower cost.
Freight cost advantage from movement of cement through cost-efficient coastal
route.
Valuation re-rating: SIL is likely to see multiple re-rating, led by doubling of capacity
over the next 30 months. JKLC and JK Cement had witnessed multiple re-rating from
EV/tonne of USD50-60 to USD100 when they had increased capacity in excess of 50%.
Efficient capacity expansion: SIL is doubling its capacity from 4.1mt to 8.2mt at
estimated capex of INR12b, which translates into capex of USD45/t. Estimated
capex for the new unit is lower than regular capex of USD80-100/ton, as major
part of investments in township and other ancillary activity has already been
incurred.
Clinker capacity addition: SIL’s clinker capacity in Kutch will be increased to
~6mt by adding another line of 10,000 tonnes per day at the existing location.
There is sufficient land available for expansion of the project at the existing
location, with total land requirement of ~31ha. The present clinker line occupies
total land of 70ha.
Exhibit 34: SIL will incur INR 12bn of capex for capacity addition of 4.2mt
Clinker Capcity Grinding Capacity Captive Power
INR 2bn
INR 6.5bn
INR 3.5bn
Further scope to augment capacity of clinkerization unit: The new clinker line
of 10,000tpd could be further increased to 12,000tpd (0.7mt) with minor
modifications and capex.
Split grinding units: SIL would set up two grinding units of 2mt each, with one of
them in proximity to the mother clinker unit in Kutch (~10km away). The other
split grinding unit would be set up in Surat to cater to the Gujarat market.
Clinker from the Kutch unit would be transported to Surat GU by way of coastal
26 December 2017 22
Sanghi Industries
shipping, where freight cost savings would be to the extent of ~30% v/s road
freight. The company would be required to construct an associated terminal for
clinker transportation to Surat, which will require capex of INR150m.
Product mix favorable: The present product mix suggests that ~35% of overall
volume is sold as PPC, where profitability is much higher than the traditional
OPC product. However, under the new expansion, the integrated grinding unit
would produce OPC, while the split grinding unit would produce only PPC of
higher profitability. Hence, the product mix for the expanded unit would be
50:50 toward OPC:PPC, as against 65:35 now.
Captive power plant and WHRS: The expanded capacity’s power requirement
would be met via its captive power plant of 63MW. Total power availability is
expected to be 139 MW, implying excess power in the unit, which could be sold
in the grid.
Market mix turning favorable: The grinding capacities at Kutch and Surat are
likely to improve the market mix for SIL, as it increases sales to the higher-priced
markets of Maharashtra and Kerala. The new integrated grinding unit in Kutch
will be mainly utilized to cater to these markets via the cost-efficient coastal
route. As there exists price/realization difference of INR20/bag, profitability
from these newer markets is expected to be significantly higher.
26 December 2017 23
Sanghi Industries
26 December 2017 24
Sanghi Industries
SWOT analysis
Abundant availability High dependence on Doubling of capacity Threat from Gujarat
of high-quality single market of from 4.1mt currently to based players to
marine limestone by Gujarat 8mt over the next 24 increase capacity in the
way of surface mining Single market cluster
months
results in lower raw concentration high Price volatility in the
Diversification into new core markets
material cost
Strategically placed higher-priced markets
near coast to use like Mumbai,
efficient mode of Mangalore, Cochin by
transportation of sea way of coastal mode
Integrated operations Product mix
with captive power
enhancement to higher
plant, port facility
proportion of PPC
26 December 2017 25
Sanghi Industries
Bull case
In the bull case, we assume volume growth for SIL to increase at CAGR of 9%
over FY17-FY20E led by increased demand from focus markets of Gujarat as also
higher volumes sold in markets of Mumbai and Cochin.
We assume realization improvement to increase at CAGR of 12% over FY17-
FY20E due to improved utilization of Gujarat market led by increased demand,
no incremental supply pressure in the core markets, diversifying to newer
markets with higher realization.
This translates into margin improvement to 29.6% in FY20 from 19.9% in FY17.
EBITDA/t will likely increase at CAGR of 28% between FY17-FY20 to INR1427
largely led by pricing improvement in core and focus markets as also higher
proportion of PPC sales in overall volumes.
This translates into earnings CAGR of 72% over FY17-FY20 on account of 39%
CAGR in EBITDA over the same period.
Given strong improvement in profitability we assign a target multiple of EV/t of
USD105 on expanded capacity of 8.2mt which is put up at an incremental capex
of ~INR12b. We hence arrive at a target price of INR171/share implying upside
of 35% from present levels.
Bear case
In the bear case, we assume volume growth for SIL to increase at CAGR of 2%
over FY17-FY20E due to weak demand in its focus markets as also coastal
markets of Mumbai and Cochin.
We assume realization improvement to increase at CAGR of 7% over FY17-FY20E
as utilization for the western region remains subdued due to weak demand and
incremental supply pressure.
This translates into margin being largely flattish to 19.1% in FY20 from 19.9% in
FY17 as realization improvement has been offset by cost push. EBITDA/t will
likely be flat between FY17-FY20 to INR695 as muted pricing improvement is
being offset by cost push.
This translates into earnings declining at CAGR of 3% over FY17-FY20.
As profitability of core markets will be sluggish and the profitability of new
capacity would be at risk, we assign a target multiple of EV/t of USD70 on
expanded capacity of 8.2mt which is put up at an incremental capex of ~INR12b.
We hence arrive at a target price of INR86/share implying downside of 32%
from present levels.
26 December 2017 26
Sanghi Industries
Exhibit 37: Scenario Analysis – Bull Case Exhibit 38: Scenario Analysis – Bear Case
FY17 FY18 FY19 FY20 FY17 FY18 FY19 FY20
Sales (INR m) 9,975 12,896 15,572 18,138 Sales (INR m) 9,975 12,130 12,482 12,844
Sales growth (%) 30.9 29.3 20.8 16.5 Sales growth (%) 30.9 21.6 2.9 2.9
EBITDA (INR m) 1,982 3,111 4,163 5,366 EBITDA (INR m) 1,982 2,812 2,387 2,103
EBITDA Margin (%) 19.9 24.1 26.7 29.6 EBITDA Margin (%) 19.9 23.2 19.1 16.4
EBITDA growth (%) 31.1 57.0 33.8 28.9 EBITDA growth (%) 31.1 41.9 (15.1) (11.9)
PAT (INR m) 631 1,344 2,258 3,213 PAT (INR m) 631 1,103 832 593
PAT Margin (%) 6.33 10.42 14.50 17.71 PAT Margin (%) 6.33 9.10 6.67 4.61
PAT growth (%) (15.68) 112.83 68.03 42.26 PAT growth (%) (15.68) 74.71 (24.59) (28.76)
EPS (INR) 2.87 6.11 10.27 14.60 EPS (INR) 2.87 5.02 3.78 2.69
Target Multiple (EV/t) USD 105 Target Multiple (EV/t) USD 70
Target price (INR) 171 Target price (INR) 86
Upside/downside (%) 35% Upside/downside (%) -32%
Source: Company, MOSL Source: Company, MOSL
26 December 2017 27
Sanghi Industries
26 December 2017 28
Sanghi Industries
26 December 2017 29
Sanghi Industries
NOTES
26 December 2017 30
REPORT GALLERY
RECENT INITIATING COVERAGE REPORTS
`
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Sanghi Industries
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The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person
or to the media or reproduced in any form, without prior written consent. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of
offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or
appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment
objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this document should make such investigations
as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to
determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative
products as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of
the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the
views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time
without any prior approval. MOSL, its associates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities
mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities
functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information that is already
available in publicly accessible media or developed through analysis of MOSL. The views expressed are those of the analyst, and the Company may or may not subscribe to all the views expressed therein. This document is
being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not
directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would
be contrary to law, regulation or which would subject MOSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to
certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents or
representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. The
person accessing this information specifically agrees to exempt MOSL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSL or any of its affiliates or
employees responsible for any such misuse and further agrees to hold MOSL or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this
information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring
Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080 1000. Compliance Officer: Neeraj Agarwal, Email Id: na@motilaloswal.com, Contact No.:022-30801085.
Registration details of group entities.: MOSL: SEBI Registration: INZ000158836 (BSE/NSE/MSE); CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser:
INA000007100. Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS
(Registration No.: INP000004409) offers wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal
Commodities Broker Pvt. Ltd. offers Commodities Products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private
Equity products
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