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BUY Sagar Cement – HDFC Sec

December 24, 2007

Sagar Cements Limited (SCL) is a Andhra based cement manufacturer in India. SCL is well on track to shed its status of a mini plant due to the huge capacity expansion planned, which could be in place before end of FY08. SCL would incur the lowest average capital cost per tonne as compared to its peers. It would incur about Rs. 1,430 per tonne on its new kiln as compared to the average capital cost of Rs. 1,600-2,300 per tonne. Private Equity player Blackstone Ventures has bought 7% stake in the company in March 2007.

SCL has a well-established network in the South, especially in Andhra Pradesh. It does its business through a wide network of 25 wholesalers and 575 dealers.Demand for cement in the South is on its way up due to setting up of new industries, roads, SEZs, malls, residential complexes, etc. and till FY2011, the demand supply situation is expected to remain favourable.

SCL could register a revenue growth of 22% in FY08, a whooping 128% in FY09 and 35% in FY10. The operating margins could be in the range of 28-31% with healthy PAT margins of about 15-17%. SCL could end with a standalone EPS of Rs. 61.62 and for FY09 and a consolidated EPS of Rs. 63.8. It is currently quoting at 5.2 times its FY09 (E) earnings. HDFC recommends to buy the stock at the current price and add the stock in the Rs. 260-280 band for a period of 3-4 quarters with a target of Rs. 492.

In a separate development, HDFC Securities has put a Target price of Rs 400 on Sunil Hitech Engineering which we initiated coverage when the stock was Rs 270.

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