Sanghi stock dives 10% after supply deal

Mumbai: Sanghi Industries has signed a supply agreement with Ambuja Cements and ACC, under which it will sell almost all its output to the two companies at a price involving a 10% markup over production cost.
The move will cap Sanghi’s profitability, analysts said, and has raised corporate governance issues among investors. The company has called for a shareholder meeting on February 8 to seek approval for the supply agreement with Ambuja and ACC.On Wednesday, the Sanghi stock fell almost 10% to Rs 134 on the BSE on the back of the unfavourable supply pact.
Bhavya Shah, an equity investor, posted on X: As per industry average, cement is sold at cost plus 25-30% markup, translating to an operating profit of Rs 1,100-1,200 per tonne. In case of Sanghi, cost plus 10% markup would mean a realisation of Rs 360 per tonne. Had it sold its cement in the open market, it would get a better realisation. Sanghi, Ambuja and ACC are all majority owned by Adani Group.
An industry observer defended Sanghi’s pricing pact with Ambuja and ACC, stating that it can’t have the same terms as that between Ambuja and ACC. Sanghi has not been making money; its production capacity utilization is just 25%; it has high operating costs in terms of electricity consumption & overhead expenses; and has about 400 dealers. On the contrary, Ambuja and ACC are both profit making units; their production capacity utilization is 80-85% and they have a dealer network of over 40,000 across the country. According to the terms of the supply pact, Ambuja and ACC will buy 80% of Sanghi’s 6 million tonne cement capacity in fiscals 2024 and 2025.
Shailesh Haribhakti & Associates in its opinion report on the supply transaction said Sanghi by entering into a transaction with a related party “mitigates the risks associated with uncertainties in the open market”. Shah also questioned the fairness report. The firm’s founder Shailesh Haribhakti is on the board of Adani group company Adani Total Gas. In a regulatory filing, Sanghi said Wednesday that the supply pact will help to improve its capacity utilization to 80% and as a result will have a positive operating profit of 9% on its sales.