Orient Cement : Strong Gains expected
Call & Research Report by Anand Rathi Research
Sector : Cement
CMP Rs. 118, Target Rs. 178 ( 50 % upside potential)
Target Period : 12 Months
Backed by its focus on higher realisation y/y and savings on its solar
power plant operationalization, Orient Cement’s Q4 FY22 performance
was good even amid rising costs. Greater cash-flows, de-levering and
better working-capital management and operating performance would
fund the expansion and keep debt in check. We retain our Buy rating,
with a lower target of Rs.178 (earlier Rs.233) on 7x FY24e EV/EBITDA.
Focus on remunerative market continues. With no big government
projects in its key operating region and its strategy to avoid far-off un-
remunerative markets, cement sales volumes fell 12.4% y/y to 1.62m tons,
though realisation/ton rose 10.3% y/y. Further, on fluctuating demand, price
hikes have been held in abeyance. The share of premium cement (stroncrete)
rose to 14% of trade sales (60% of overall sales). We expect volume/revenue
to clock 7%/9% CAGRs over FY22-24.
Cost pressure in sight. On the high-cost context and high discretionary
expenses, EBITDA fell 24% y/y to Rs1.5bn and EBITDA/ton by 13.6% y/y
to Rs946 (better than the industry). Costa in Q1 FY23 are expected to rise 12-
13% on exhaustion of economical fuels. The solar unit and efforts to keep
alternative fuel to 15-20% of the fuel mix, and the coming WHRS by end-FY23
would help optimise costs. We expect EBITDA to record 8% CAGR over
FY22-24.
Business outlook; Valuation. Guidance for capacity expansion completion
by FY24 at Tiroda (2m tonnes) and Devapur (clinker ~2m tonnes, GU ~1m
tonnes) were maintained. No orders for equipment, though, have been placed.
The company repaid Rs4.86bn debt in FY22 (gross debt at 31st Mar’22 was
Rs3.1bn). The process for approvals for the mining-lease transfer in Rajasthan
is expected to be completed shortly. The planned capex would push debt up
to a peak of Rs10bn-11bn by FY24, when net D/E would be 0.6x (vs 0.2x in
FY22). We retain our Buy rating, with a lower target of Rs178.
Risks: Rising pet-coke/diesel prices, demand slowdown.
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