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Not out of the woods yet; maintain Hold
* Orient Cement reported EBITDA of Rs379mn vs. our estimate of Rs320mn and OPM of 6.6% vs. our estimate of 5.7%, primarily driven by lower-than-expected decline in realization (down 2.4% qoq vs. 3.5% decline estimated). EBITDA/ton was at Rs251 vs. our estimate of Rs210.
* Sales volume was up 10.2% yoy to 1.51mt, with capacity utilization standing at 75% vs. 68% in Q3FY18. PPC sales stood at 60% vs. 64% in Q3FY18. Adjusted for higher FoR sales, realization was down 1.2% yoy/2.4% qoq. EBITDA/ton was at Rs251 vs. Rs286/Rs243 in Q3FY18/Q2FY19.
* Opex/ton was down 0.3% yoy despite an increase in diesel and pet coke/imported coal prices. Lower realization led to a 101bps decline in OPM. Cement prices in its key markets continued to remain subdued, which remains a concern.
* We further cut FY20/21E EBITDA estimates by 4.7%/5.4%, considering lower cement prices. The revival in cement prices in its core markets would be a key monitorable going forward. We maintain our Hold rating, with a revised target price of Rs74.
Lower realization impacts profits
Orient Cement’s Q3FY19 results came in above our estimates, with EBITDA at Rs379mn vs. our estimate of Rs320mn and OPM at 6.6% vs. our estimate of 5.7% on higher-than-estimated realization. Realization, adjusted for higher FoR sales, was down 1.2%yoy/2.4% qoq vs. estimated 3.5% qoq decline. Sales volumes increased 10.2% yoy to 1.51mt, with a capacity utilization of 75% vs. 68%/74% in Q3FY18/Q2FY19. Higher sales volume led to an 11.6% yoy growth in revenues. Reported opex/ton was up 2.3% yoy; however, adjusted for higher FoR sales, opex/ton was down 0.3% yoy/2.8% qoq. Energy costs were down 4.1% yoy/5.3% qoq despite an increase in pet coke/Imported coal prices. Freight costs, adjusted for higher FoR sales, were up 9.2% yoy on higher diesel prices. Other expenses were down 10.1% yoy. Lower realization led to a 3.2% yoy decline in EBITDA and a 12.1% yoy drop in EBITDA/ton. The company narrowed its losses to Rs133mn from Rs177mn/Rs167mn in 3QFY18/2QFY19.
Lower cement prices a concern; maintain Hold
Earnings of cement companies have seen continuous downgrades in YTD FY19 as cement prices have not improved. We further cut FY20/FY21E EBITDA for Orient by 4.7%/5.4%, considering weak cement prices in its key markets. Company is considering brownfield expansions at its Devapur, Telangana plant in the first phase and subsequently it’s Chittapur, Karnataka plant in the next phase. We will wait for more clarity on the planned expansion projects; however, higher capex may lead to increased debt and a stretched balance sheet. We maintain our Hold rating on the stock with a target price of Rs74, valuing it at 8x FY21E EV/EBITDA. The key factor to watch out for would be the revival in cement prices in its key markets.
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