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Pick Of The Week : Orient Cement Ltd - HDFC Securities
Established in 1979, Orient Cement was formerly a part of Orient Paper & Industries. It was carved out/demerged in the year 2012. Orient Cement began cement production in the year 1982 at Devapur, Telangana. In 1997, a split-grinding unit was added in Jalgaon, Maharashtra. In 2015, it set up an integrated cement plant at Chittapur, Karnataka. With a total capacity of 8 MTPA, it serves southern and western India. The product mix includes Pozzolana Portland Cement (PPC) & Ordinary Portland Cement (OPC) marketed under the brand name of Birla.A1 – Birla.A1 Premium Cement and recently launched Birla.A1 StrongCrete.
* Demand revival and narrowing supply demand gap in OCL’s markets will help improve its realisations as well as utilisation; Capex discipline with some volume growth and decent realisation growth to drive rerating
* New railway siding and planned waste heat recovery system capex to help company improve its margins;
* Introduction of superior quality cement in Q1FY19 expected to help company improve its margin profile;
* Aspirations of being a 14-15 MTPA player over the medium term balanced with rationalised capex plans;
* Strong financials with growing revenues, expanding margins, improving return ratios and leverage ratios, etc.
* Volatility in cement prices may bring down company’s profitability;
* Overcapacity in Southern states results in high competition;
* Fuel and power costs volatility may impact margins;
* Irrational capex can hurt company’s long term prospects.
View and valuation:
OCL, a cement player catering to Southern India predominantly, is on the cusp of accelerated earnings growth after a stressful period due to operational lull and high financial leverage on books. Demand growth for cement in Southern India has now picked up and is expected to sustain well for the coming fiscals; this is helping players improve their utilisations. Also, the net sales realisations has now improved with realisations moving northwards / staying high in the past 4 months.
Apart from these growth levers, we can expect a better margin profile for OCL due to the new railway siding project near its Chittapur plant and WHRS captive power arrangements at two of its plants. Margins may expand on account of company’s efforts to improve its realisations from the superior quality cement it introduced in Q1FY19. Large debt on books and company’s earlier plans to almost double capacities in a short span raised concerns in the market about company’s balance sheet strength.
These concerns now stand resolved with company pulling out of acquiring Jaypee group assets and further indicating organic growth to continue gradually after considering the balance sheet strength. Realisations that have stayed high could result in sharp moves in EBITDA over the next few quarters and improve its debt equity ratio from 1.2 in FY19 to 0.9 in FY21. All this leads us to believe that the company get re-rated from its current level of $62.7 FY21 EV/tonne.
We feel investors could buy the stock at the CMP (11.2xFY21EPS, 6.74xFY21 EV/EBITDA and FY21$62.7 EV/Tonne) and add on dips to Rs94-98 band (9.9xFY21EPS, 6.25xFY21 EV/EBITDA and FY21$58.1 EV/Tonne) for sequential targets of Rs 122.5 (12.6xFY21EPS, 7.3xFY21 EV/EBITDA and FY21$67.8 EV/Tonne 47x FY21E EPS) and Rs 131 (13.5xFY21EPS, 7.63xFY21 EV/EBITDA and FY21$70.9 EV/Tonne) over the next 3-4 quarters.
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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475
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