Saurashtra Cemenet: A Turnaround Story & High Potential Multibagger

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Most of the economic sectors are deeply awaiting a cut in the interest rates and some policy amendments in the near future. Infrastructure and Real estate is among them. Any positive development in this sector should surely help the Cement Industry. With the Cement Industry being in focus in this bull run, Saurashtra Cement Ltd is a turnaround story.

                                                               

Saurashtra Cement Limited (SCL) is the flag ship company of The Mehta Group, formed in 1956. SCL is one of the leading players in the Indian cement industry, manufacturing Portland Pozzolana Cement (PPC), Ordinary Portland Cement (OPC) and Sulphate Resisting Portland Cement (SRPC). 

SCL markets cement under the brand name "HATHI CEMENT".

SCL's plant at Ranavav, located in Gujarat state has a capacity of 1.5 MTPA. The plant is a modern energy efficient dry process plant comparable to international standards and makes use of latest machinery sourced from reputed international companies. The plant offers locational advantages because of its proximity to the Porbandar and Veraval/Okha ports, rail net work and is close to highways. SCL thus has competitive access to the domestic markets and also to the large export markets in the Africa, Middle East countries, Sri Lanka etc. by the economical sea route.

SCL's modernization implemented in the recent years has paid results. State-of-the-art equipment and control systems installed have led to capacity enhancement. The new captive power plant which can be operated with different fuels like coal, pet coke & lignite has improved the overall performance by way improved reliability, consistency, better cost control and improvement in quality and lower emission levels.




What Went wrong ?

​The earthquake in Gujarat (April 2006), high power costs, setting up of additional capacities by Sanghi Inds and the consequent price war to capture market share resulted in SCL and most Gujarat cement players going into red in 2007-2008. While setting up of Thermal power plant of 25 MW helped control power costs, competitive scenario has eased a bit over the last few quarters. In the process the debt situation of SCL worsened, and the interest payments shot up. Further SCL also could not pay sales tax, electricity duty etc to the state Govt in time. As part of one time settlement with the Gujarat Govt, SCL was asked to deposit Rs70 cr with Gujarat State Financial Services Ltd in 2008. In the interim SCL had two accounting years stretching into 18 months and 15 months respectively (June 2007 to Dec 2008 and Jan 2009 to Mar 2010). To come over these difficulties and fund the thermal power plant (costing Rs125 cr) SCL had raised Rs26 cr by way of convertible debentures from Mauritius Debt Management Ltd (converted into equity shares in Aug 2007 @ Rs35 each – resulting in a stake of 14.55% held by them). In addition an amount of Rs5.12 cr was raised from International Debt Management (IDM) by way of 13% optionally convertible cumulative preference shares (which are now not convertible) and Rs 208 cr loans from IDM.

Why the turnaround Story:
The company had been consecutively posting losses in the preceding years and was declared a Sick Industrial Company by the BIFR due to which the stock was beaten down but consequently the net worth of the company became positive again, it is no more a Sick Industrial Company as can be inferred from the latest annual report of the company. If we have a look at the performance of the company in the past one year, there is a drastic improvement.



As we all know, Q'2 and begining of Q3 is the weakest quarters for any cement company due to the rainy season. The cement prices fall due to low demand from the construction industry as generally no one prefers to contruct during the rains.
Hence, QoQ, the Sales and earnings dipped, mainly due to the monsoon season during which demand was subdued.

The company delivered extraordinary results for Q'1 2014-15 generating an EPS of Rs. 3.02 which is about 80% of the EPS of Rs. 3.86 which it delivered for the entire financial year 2013-14.

After talking to the Management, the management said that this expansion project which started with high hopes had to be stopped in between in the year 2005 due to inadequate funding. It was kept on hold in hopes of receiving finance from various sources but due to the poor performance of the company, the project was finally abandoned. The company has since then been writing off the amount in parts from Capital WIP, the cost of the project as Impairment.

The management further said that no further impairment will be done in Q'2, Q'3 or Q'4 2014-15 and depreciation expense will now normalize to 3-5 crores per quarter as it has always been. This can be seen in Q'2 2014-15 below where it came down to 3.31 crore





99.3% of promoter’s stake has been pledged to IDM as collateral for loans obtained from them. Most of these loans have been repaid by the company as we can see from the amount of reduction in long term borrowings of the company and the company shall become debt free very soon. Hence, these pledged shares do not pose any risk as the company is easily able to cater to the interest payments and repayment of principal amount as evident from the huge cash reserves of the company

If we analyse the Q'2 Balance Sheet, we find that:

• Debt has reduced significantly from Rs 38 crores to Rs 11 crores.
• Cash balance has increased from Rs 40 crores to Rs 43 crores. 
• The debt equity ratio has improved to 0.21:1 from 1.03:1 which is very favorable.
• The debt service coverage ratio has improved drastically from 0.33 to 1.31 ensuring the company is easily fulfilling it's commitments.
• The interest service coverage ratio has improved from 1.58 to 12.86 which is very positive.

Key Points

1. The company has been constantly reducing its debt. During the year 2013-14, the company reduced it's debt by Rs 76 crores from 114 crores to Rs 38 crores. The company in 2014-15 has already reduced it further by Rs 27 crores to just Rs. 11 crores. The management also said that the company will become debt free by 31st March, 2015.
2.  The company's vision is to increase it's capacity from 1.5 MTPA to atleast 2 MTPA in the coming years. This reflects the optimism and the growth vision of the company. 
3. The company operates its own captive Thermal Power Plant of 25 MW with multiple fuel options which caters to all of the electricity needs of the company. The company operates it's own Captive jetty at Porbandar Port which can berth ships up to 37,000 DWT; with a loading capability of 20,000 Ts, equipped with two cement silos and fully mechanized loading facilities. This helps the company in tapping the states of Maharashtra, Kerela etc. in the domestic market as well as Sri Lanka and Middle East Countries in the overseas market as is visible in the Annual report of the company.
4. The promoter holding is 64.46% which is highly positive. The management is highly optimistic about the performance in the company in the coming quarters.
5. The price range i.e. Rs 40-45 at which the stock is currently trading makes it highly undervalued and thus a value buy at this level. 

Clients:

The Management also said there are in talks to cater to upcoming smart cities in the state of Gujrat.

With the stable political scenario and the sustained development strategies the need of infrastructure facilities and the housing needs ofthe population will enhance the consumption of cement further in the country. The long-term future of the cement industry is optimistic and positive.

After discussion with the management in the AGM, the management informed that the bad times are over for the company and the company has recovered completely which can be reflected in the latest financials of the company and in the time to come, the company is likely to do exceedingly well. 

On this estimation, the stock is currently available at P/E levels of 4.2 whereas companies in this sector are generally quoting at P/E levels of 20-30. Hence, as can be inferred, at these levels the stock has the capacity to become a multibagger in the coming months.