Volume growth led profits
* Healthy volume growth led by market share gains: Revenue increased 36% YoY (-8% QoQ) to INR5.2b (est. of INR4.7b), as volumes grew 11.5% YoY to 1.31mt (est. of 1.2mt), led by market share gains by selling volumes at higher lead distances. Realizations increased 22% YoY (-2% QoQ) to INR3,996/t, better than estimates due to higher proportion of FOR sales and an increase in lead distances.
* YoY margin improvement led by better realizations: The sharp YoY margin improvement of 10pp to 14.3% was led by improved pricing in its focus markets of west and south. This was partially offset by higher cost/t (+9% YoY to INR3,426/t). Hence, EBITDA/t increased 303% YoY to INR570/t (-32% QoQ due to a seasonally weak quarter). Power & fuel cost/t declined 4% YoY due to higher usage of domestic coal. Freight cost/t increased 43% YoY due to a shift in invoicing toward FOR terms and an increase in lead distance. Hence, EBITDA increased 350% YoY (-36% QoQ) to INR746m (est. of INR625m), with a margin of 14.3% (+10bp YoY).
* Other key highlights: (1) PPC sales at 64% at overall operations. (2) Petcoke usage at 56% in Chittapur and 22% in Devapur on calorific value. 3) Lead distance increased to over 300km.
* Valuation view: Proposed acquisition of JPA’s assets would help ORCMNT to raise capacity by 38% at reasonable valuation and significantly reduce lead time. While the move would be dilutive to earnings and return ratios over the near term, it will help the company to become a pan-India player by diversifying into the newer markets of central/east India. We like the quality of asset, and thus, believe that combined valuation of USD89/t (i.e. Orient’s current + proposed asset valuations) is attractive. The stock trades at EV of 9.4x FY19E EBITDA and USD85 per ton on standalone operations. We value ORCMNT at EV/ton of USD90 on FY20E, at a 30% discount to replacement cost, and accordingly assign a TP of INR205. Maintain Buy.
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