Published on 16/09/2020 12:28:47 PM | Source: ICICI Securities Ltd

Buy Orient Cement Ltd For Target Rs.84 - ICICI Securities

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Better realisation drives outperformance

Orient Cement’s (ORCMNT) Q1FY21 EBITDA at Rs982mn (down 34% YoY) was better than our / consensus estimate of Rs843mn owing to higher realisation, which increased sharply by 20.4% QoQ / 10% YoY (I-Sec: 17% YoY). Total cost/te increased 7% YoY while volumes declined 46% YoY to 0.82mnte – both broadly in line with estimates. Accordingly, EBITDA/te increased 21% YoY to an all-time high at Rs1,198/te (I-Sec: Rs1,015/te). Management had earlier deferred expansion plan due to Covid-19 and any decision on this front is likely to depend upon demand recovery and comfort on leverage. Factoring better margins, we raise our FY21EFY22E EBITDA by 8-12% and increase our target price to Rs84/share (earlier: Rs54/share) based on 6x FY22E EV/E also aided by lower capex over FY21-22E.

* Revenue declined 40% YoY to Rs4.1bn, in line with our estimates. Realisation/te sharply increased by 20.4% QoQ / 10% YoY to Rs5,004/te owing to sharp price hike in South region and Maharashtra and increase in trade sales. Volumes fell 46% YoY to 0.82mnte (in line with volume decline in South) owing to Covid’19 lockdowns. Management mentioned that overall volumes are broadly sustaining on MoM basis in Jul’20 with pick-up in non-trade / infra demand. Average prices have declined by Rs5-7/bag in Jul20 with onset of monsoon. With increasing non-trade sales, overall impact on realisation would be higher.

* EBITDA declined 34% YoY to Rs982mn (I-Sec: 843mn). Total cost/te increased 7% YoY / 13% QoQ to Rs3,807/te mainly due to poor operating leverage and swing in inventory adjustment. Raw material cost/te doubled YoY on sharp inventory movement and ~Rs55mn impact (Rs67/te) on procurement of fly ash from distant sources. Power & fuel cost/te declined to Rs896/te from Rs1,033/te YoY owing to increased usage of pet coke, lower fuel price and higher PPC sales. Freight costs/te increased from Rs1,196/te to Rs1,246/te YoY owing to higher cement handling charges, increase in packing charges due to higher trade sales (~Rs10/bag) despite lower lead distance which declined by 20-25kms to 290kms. Employee cost was down 10% YoY to Rs370mn; while other expenses were down 44% YoY to Rs570mn which includes payment of Rs40mn (~Rs49/te) to PM Cares Fund relating to Covid19. EBITDA/te increased by 21% YoY to Rs1,198/te (I-Sec: Rs1,015/te). PAT declined 54% YoY to Rs256mn (I-Sec: Rs167mn).

* Expansion plan getting deferred: ORCMNT is still in the process of acquiring various government approvals / land for its expansion projects. Any decision on expansion is likely to depend upon demand recovery and comfort on leverage. Net debt to EBITDA ratio is unlikely to exceed the current ~3x over next few years. Company may spend on waste-heat recovery over FY21E-FY22E. Capex for FY21E is unlikely to exceed Rs200-300mn. We have factored-in capex of Rs4.3bn over FY21E-FY22E and the actual capex is likely to be lower.

* We factor 3% volume CAGR over FY20-22E and expect EBITDA/te to increase from Rs659/te in FY20 to Rs773/te in FY22E. Valuations at EV/te of ~US$40/te remains attractive, in our view


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