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Business News/ Market / Mark-to-market/  Lower GST on lignite a shot in the arm for Sanghi Industries
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Lower GST on lignite a shot in the arm for Sanghi Industries

Sanghi Industries is poised to benefit from the reduced GST on lignite, given its plant's proximity to limestone mines and fly ash, and the use of lignite as raw material for power and fuel

No wonder, Sanghi Industries has increased its dependence on lignite post GST implementation. Graphic: Naveen Kumar Saini/MintPremium
No wonder, Sanghi Industries has increased its dependence on lignite post GST implementation. Graphic: Naveen Kumar Saini/Mint

A key concern for most cement makers currently is surging power and fuel cost on the back of higher petroleum coke prices.

But Gujarat-focused Sanghi Industries Ltd is an exception. The company’s power and fuel cost declined sequentially in the September quarter.

This easing is likely to continue, courtesy reduced tax rate on lignite. Under the goods and services tax (GST), the duty on lignite has been cut to 5% from 28%.

Given the proximity of its plant to limestone mines and fly ash, and the use of lignite as raw material for power and fuel, Sanghi Industries is well poised to benefit from this tax cut.

No wonder, the company has increased its dependence on lignite post GST implementation. At present, 75% of its fuel requirements are being met through lignite. In fiscal 2017, coal and lignite usage was in the ratio of 60:40.

In a post-earnings conference call with analysts, the company management said that the cost of production through lignite is cheaper compared to imported coal since coal costs Re1/kilocalorie whereas lignite costs Rs0.73/ kilocalorie.

According to analysts, the change in fuel mix would bring the company’s blended cost down to 85paise/kilocalorie from Re1/kilocalorie earlier.

More than 90% of the company’s volume growth comes from Gujarat. About 4.5% is from Rajasthan, 1.5% from Maharashtra and the rest from Kerala. Now the company is targeting to improve sales growth outside Gujarat to 12-15% in the next 9-12 months from the current 7%, the management said.

With this focus, it has added two ships to its transport mix in an attempt to penetrate Mumbai. Two ships have already arrived and successful trials have been done at both the ports in September-end, the management informed.

Analysts have looked at this favourably and expect the addition of ships to increase volume in Mumbai significantly, and could eventually lead to doubling of capacity to 8 million tonnes per annum (mtpa).

But does an edge over industry peers on fuel costs and the potential capacity increase justify the massive 143% surge in the stock? The stock trades at around 18 times estimated FY19 earnings and analysts say the rally is overdone.

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Published: 21 Nov 2017, 07:34 AM IST
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