Sanghi-Adani deal: Proxy adviser gives thumbs-up for related-party transactions

Mumbai: Cement maker Sanghi Industries Ltd has received support from proxy advisory firm InGovern for its proposals to purchase bulk coal from Adani Enterprises Ltd as well as sell cement it produces in bulk to Ambuja Cements Ltd and its subsidiary ACC Ltd. 

Ambuja Cements had acquired a majority stake in Sanghi Industries last year. The Adani Group in 2022 acquired Ambuja Cements and ACC.

InGovern oBSErved that although the price decided for the sale of cement and clinker was below market benchmarks, the transaction would ensure higher capacity utilisation at Sanghi Industries, helping it return to profitability.

“Given that the capacity of Sanghi is grossly underutilized, receiving of advance payment for confirmed bulk purchase from (Ambuja) and ACC will translate into profits for the company,” InGovern said in a report.

Other major domestic proxy advisory firms do not cover Sanghi Industries. 

As part of the proposed arrangement, Sanghi Industries will sell cement and clinker that it produces in bulk to Ambuja and ACC at a 10% markup over the cost of production of the previous quarter. The companies will pay in advance for the purchase, and sell the cement under their brands.

“For various reasons, including financial constraints, the company has been operating below 25% utilization of its installed capacity,” Sanghi Industries said when it put forth the resolutions proposing these transactions. “With this arrangement, the company is expected to improve its capacity utilization to around 80%, turn Ebitda positive and improve its operating cashflow.”  

Another proposed related-party transaction is for Sanghi Industries to buy coal and other fuel from Adani Enterprises at market price. 

The resolutions will be put forward for shareholder vote at the company’s extraordinary general meeting scheduled for Thursday.

Being an ordinary resolution, it will need 50% shareholder votes in favour to sail through. Promoters hold 72.6% of the company.  

Earlier, when the resolution was first put forth on 16 January, the share price of Sanghi Industries cracked by over 20% within the next three trading sessions, triggering a 10% lower circuit once in the process. Analysts had voiced concern over the sale price of cement and clinker proposed at a 10% markup, terming it lower than the market benchmark of 25-30%.

“We believe that this will cap Sanghi’s profitability substantially as [the] entire production will be purchased at just a 10% markup to operating costs,” Mangesh Bhadang, equity analyst at Centrum Broking, had said then.  

InGovern also noted in its report that the pricing was below the industry benchmarks of cost plus 25-30%. However, the proxy advisory firm deemed the perceived benefit of higher capacity utilisation to outweigh the lower margins.  

Sanghi Industries says the arrangement will turn its Ebitda margin around from -32% to 9%, with an estimated Ebitda of 180 crore.

“Given the overall benefits associated with the transaction, we recommend shareholders vote FOR the resolution,” InGovern said in its report. 

The proxy advisory firm also noted that the company has sought approval for the related-party transactions for a limited period till the end of FY25, and not an indefinite approval.

Sanghi Industries shares lost 3.83% to close at 115.45 apiece on BSE on Tuesday. The stock has lost 26% since hitting a 52-week high of 156.2 per share on 15 January.

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Published: 06 Feb 2024, 06:38 PM IST

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