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No improvement in outlook yet; maintain Hold
* Orient Cement’s Q3 results were better than our estimates as higher volumes and lower opex offset lower realization. EBITDA stood at Rs550mn vs. Rs499mn estimate, and OPM was 9.7% vs. estimate of 9.2%. EBITDA/ton was Rs372 vs. estimate of Rs367.
* Key positives: 1) benign operating costs supported by lower energy and freight expenses; 2) sales volume declined just 2% yoy vs. estimate of 10% decline. The 8% qoq decline in realization vs. our estimate of 3.5% decline was the key negative.
* Management indicated of brownfield expansion at its Devapur, Telangana, plant in the first phase, and subsequently at its Chittapur, Karnataka, plant in the next phase. Environmental Clearance (EC) for the proposed expansion is expected by Q1FY21.
* We reduce FY20-22E EBITDA by 3-5% as we reduce sales volume/realization assumptions. We estimate net debt/EBITDA at 3.5x/3.2x/2.5x for FY20/21/22. We roll over valuation multiples to FY22E and maintain Hold with a TP of Rs88.
Benign costs and low base help clock better numbers: Orient Cement’s Q3 EBITDA at Rs550mn was better than our estimate of Rs499mn as the reduction in opex/ton and sales volumes were better than our estimates. Sales volume was down 2% yoy (estimate: 10% decline). Opex/ton declined Rs86/ton yoy and Rs272/ton qoq. Capacity utilization was 74% vs. 76%/62% in Q3FY19/Q2FY20. Lower cement prices in Andhra Pradesh, Telangana and Maharashtra markets resulted in an 8% qoq (up 0.9% yoy) fall in realization in Q3. Opex/ton decline was driven by: 1) 4.1% yoy/10.4% qoq decline in energy costs due to lower pet coke prices (25-30% yoy decline) along with the increased usage of pet coke; 2) freight expenses were down by 2.8%yoy/4.4%qoq due to the decline in average lead distance and increased proportion of rail transport. EBITDA rose 45% yoy with a 310bps yoy OPM expansion to 9.7%, primarily on lower costs. EBITDA/ton was Rs372 vs. Rs251/Rs432 in Q3FY19/Q2FY20. Interest costs were up 11.8% yoy, while ETR was at 29.9% vs. 32.3% in Q3FY19. Loss in Q3 stood at Rs57mn vs. Rs137mn/Rs77mn loss in Q3FY19/Q2FY20.
Cut FY20/21 estimates; maintain Hold: We reduce FY20-22E EBITDA by 3-5% as we lower volume estimates in the range of 3-5% and realization estimates by 3-4%. Management had indicated brownfield expansion at its Devapur, Telangana, plant in the first phase and subsequently at its Chittapur, Karnataka, plant in the next phase. Environmental Clearance (EC) for the proposed expansion is expected to be received by Q1FY21. We estimate net debt/EBITDA at 3.5x/3.22x/2.5 for FY20/21/22 and believe that there could be further delay in expansion plans. We roll over valuation multiples to FY22E from Sep’21E earlier and maintain Hold rating with a TP of Rs88 (7x FY22E EV/EBITDA). The key risk is a rise in cement prices in its major markets.
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