Buy Orient Cement Ltd For Target Rs.97 - HDFC Securities
Orient Cement Ltd.(OCL) is a CK Birla group company with three decades old history. It has a diversified market presence across different regions in India. It has 8 MTPA of cement capacity and 5.2 MTPA of clinker capacity. The company has been focusing on increasing captive power plant which can improve operating efficiency. Orient cement has also been working on reducing debt burden from the balance sheet.
We expect that Covid-19 led lockdown and slowdown in the economy could lead to subdued growth in volumes for Orient Cement for FY21 but benign raw material price, buoyant cement prices and aggressive control on variable costs are likely to drive EBIDTA growth. The industry has a high dependence on real estate and infra sector which is expected to be impacted due to expected slowdown in the economy. Going forward, we expect, a gradual recovery in cement demand and volumes are likely to pick-up from H2FY21 onwards. Also, on the demand side, key growth drivers are likely to be pick up in rural housing, Pradhan Mantri Awas Yojana (rural), Pradhan Mantri Gram Sadak Yojana and spending on key infrastructure projects.
Valuations and Recommendations:
We expect that the company will get benefit from the strong regional presence, improving utilization and cost efficiencies apart from industry triggers of higher realization. We like Orient Cement due to its strong & experienced management, substantial ongoing cost reduction focus. However, in short to medium term, demand recovery in core markets AP/Telengana and Maharashtra continues to be key monitorable.
We expect, 2% CAGR in top-line and 17% EPS CAGR over FY20-22E. At the LTP, the company is trading at FY22E EV/T of $44.7/T, 6.47x FY22E EV/EBITDA. We feel the base case fair value of the stock is Rs.88 (FY22E EV/T of $48.3/T, 6.6xFY22E EV/EBITDA) and the bull case fair value is Rs.97 (FY22E EV/T of $51.4/T, 7.1xFY22E EV/EBITDA). Investors can buy the stock at LTP and add on dips to Rs.68-70 band (FY22E EV/T of $41.7/T, 5.7xFY22E EV/EBITDA).
However, over the long term the company will have to expand capacity out of these areas of oversupply for valuations at high levels to sustain.
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