Infrastructure And Housing Boom Will Drive A Powerful Cement Upswing Ahead

Catalysts

About Sagar Cements

Sagar Cements is a regional cement producer focused on expanding capacity and improving operating efficiency to serve high growth infrastructure and real estate markets.

What are the underlying business or industry changes driving this perspective?

• Accelerating infrastructure and housing spend in Andhra Pradesh and Telangana, including data center led ecosystems and large public housing schemes, is expected to support sustained double digit regional demand growth and drive higher volumes and topline expansion.
• Commissioning of new clinker and grinding capacities at Dachepalli and Jeerabad, taking total capacity to around 12 million tonnes by FY 27, positions the company to capture this demand upswing and unlock operating leverage benefits for earnings.
• Ongoing efficiency projects such as the six stage preheater at Dachepalli, reduction in clinker factor and route optimization are set to structurally lower power, fuel and freight cost per tonne, lifting EBITDA margins and net profitability.
• Scaling up renewable and waste heat recovery power, including the 4.35 megawatt project at Gudipadu, should meaningfully cut energy costs and reduce earnings volatility tied to pet coke and coal prices, improving cash flows and return ratios.
• Turnaround of Andhra Cement with upgraded assets and utilization targeted at 50 to 60 percent, aligned with improving realizations in South India as capacity additions moderate, can convert a current loss making unit into a contributor of INR 500 to INR 600 EBITDA per tonne and boost consolidated margins and earnings.

Assumptions

This narrative explores a more optimistic perspective on Sagar Cements compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Sagar Cements's revenue will grow by 14.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -6.7% today to 9.2% in 3 years time.
• The bullish analysts expect earnings to reach ₹3.4 billion (and earnings per share of ₹45.63) by about December 2028, up from ₹-1.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 16.0x on those 2028 earnings, up from -16.7x today. This future PE is lower than the current PE for the IN Basic Materials industry at 30.3x.
• The bullish analysts expect the number of shares outstanding to decline by 5.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.2%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Despite strong volume growth and higher capacity utilization across most plants, the company is still reporting a consolidated loss after tax of INR 44 crores. If realizations remain flat while fixed costs rise from ongoing capacity additions and employee cost inflation of roughly 10 percent annually, earnings could remain negative and delay the anticipated turnaround in net margins and earnings.
• The strategy depends heavily on sustained double digit cement demand in Andhra Pradesh and Telangana from infrastructure, data centers and housing. Management itself points to extended monsoons, seasonal price corrections and staggered project ramp ups, so if state level execution or funding of these projects slows, volumes in the core South region could undershoot expectations and constrain revenue growth and operating leverage.
• Industry dynamics in South India remain exposed to new and recently ramped up capacities from larger peers, as well as upcoming lines at Petnikota and Kalaikunda. If competitive supply continues to build faster than demand, it may cap or compress prices beyond the 3 to 5 percent seasonal decline seen, which would pressure realizations, EBITDA per tonne and consolidated margins.
• The company is pursuing an aggressive capital expenditure plan of roughly INR 450 crores in FY 26 and INR 250 to INR 275 crores in FY 27 while already carrying gross debt of INR 1,510 crores. Any delay in commissioning, weaker than expected utilization of new capacity or slower cash inflows from the Vizag land sale and Andhra Cement turnaround could strain the balance sheet and increase interest costs, weighing on earnings and net margins.
• The improvement narrative assumes material cost efficiencies from lower clinker factor, higher renewable and waste heat recovery share and stable power and fuel costs. However, pet coke prices are already showing an uptick and freight per tonne has risen versus last year, so if energy and logistics inflation persists or government incentives of about INR 46 crores this year taper faster than expected, unit costs could stay elevated and prevent EBITDA per tonne from reaching the targeted INR 600, limiting operating margin expansion and earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Sagar Cements is ₹326.0, which represents up to two standard deviations above the consensus price target of ₹264.0. This valuation is based on what can be assumed as the expectations of Sagar Cements's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹326.0, and the most bearish reporting a price target of just ₹198.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be ₹37.1 billion, earnings will come to ₹3.4 billion, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 16.2%.
  
• Given the current share price of ₹213.3, the analyst price target of ₹326.0 is 34.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.