Sanghi Industries gains smartly on favorable business outlook

MUMBAI: A favorable macro-economic situation in terms of low coal prices and robust cement demand has lead to the ET cement Index outperforming the broader Sensex. One of the small cap cement company - Sanghi Industries is one of the biggest gainers in the current rally in the cement sector. The company has gained 77% as against a return of 15% by the ET Cement Index in the last one month.

Gujarat based Sanghi Industries is a small sized cement manufacturer with a capacity of 3 million tons (MT) per annum. Due to inconsistent results, the investor interest in the company's stock had been lacking over the last two years. The company had been posting losses in the four out of last eight quarters. One of the major reasons is the frequent breakdown of its diesel fired power generators, which was a hindrance in operating its cement plant to its capacity.

The company had to rely on power generators, as there was no grid connectivity near its plant location. However, it has set up a captive power plant in FY12. Another positive for the company has been lower coal costs. The average international coal prices since April 2012 is down 25% when compared to the average price in the same period last year. As a result, the company is expected to maintain a similar operating margin as in June 2011 quarter. In addition, lower demand last year had led to flat cement prices in Gujarat.

Cement prices at present are more than 20% higher than the previous year's price. The company is now looking into supply to Mumbai region. It is presently developing a port in Raigad district on the outskirts of Mumbai. By transporting cement through the sea route from the Kutch region to Mumbai, it plans to reduce logistics costs, thereby enjoying higher realizations.

At present stock price of Rs 25, the company is trading at an Enterprise Value (EV)/ EBIDTA of 6, which is inline with its similar sized peers.