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Profitability hinges on price hike

Orient Cement’s (ORCMNT) Q2FY22 EBITDA at Rs1.3bn (up 18% YoY) was broadly in line with consensus estimates. EBITDA/te declined 23.4% QoQ at Rs1,048/te (ISec: Rs1,016/te) primarily due to lower realisation (down 5.5% QoQ). Cost/te increased by 1.1% QoQ (up 5.1% YoY) owing to higher input prices. While investor concerns around sharp cost increases seem valid, industry has demonstrated strong pricing resilience in the past. Our recent channel checks suggest companies have increased prices by Rs15-20/bag across regions. ORCMNT’s net debt further reduced by Rs1.7bn in H1FY22 to Rs6bn. We raise our target price to Rs177/sh (earlier: Rs173/sh) based on 6x Sep’23E EV/E on a quarterly rollover. Maintain ADD. Key risk: Lower demand / pricing.

* Revenue increased 28% YoY to Rs6.1bn on a low base (I-Sec: Rs6.2bn). Realisation/te was down 5.5% QoQ (up 2.6% YoY) to Rs4,798/te (I-Sec: Rs4,864/te) owing to pricing pressure in its core markets. In Q2FY22, premium products contributed ~10% of trade sales volumes. Overall blended cement sales contributed ~63% of total sales during the quarter. Volumes were up 25% YoY on a low base to 1.28mnte implying 64% utilisation.

* Management maintained its 20% YoY volume growth guidance in FY22 with volumes at 6mnte implying ~75% capacity utilisation. It expects EBITDA in FY22 to exceed Rs6bn and EBITDA/te to come in at ~Rs1100/te in H2FY22E. Cost pressures are unlikely to ease before Dec’21/Jan’22. ORCMNT expects to clock better volumes in Oct’21 on a MoM basis. Management expects demand to pick up post Diwali in its core markets and believes that increase in input costs is likely to be passed on to consumers by increasing cement prices. The company took a price hike of Rs15-20/bag in Oct’21.

* EBITDA increased 18% YoY to Rs1.3bn (I-Sec: Rs1.3bn) with EBITDA/te declining 5.6% YoY to Rs1,048/te (I-Sec: Rs1,016/te) owing to higher costs which were partially offset by higher realisation YoY. Total cost/te increased 5.1% YoY and 1.1% QoQ at Rs3,749/te. Raw material plus power and fuel costs/te rose 6.3% YoY (flat QoQ) on account of higher fuel prices. In Q2FY22, alternate fuels comprised ~10% of the fuel mix with coal at 60-65% and petcoke at 25%. Freight cost/te increased 8.3% YoY (declined 3% QoQ) owing to higher diesel prices and packing cost. Finance cost during Q2FY22 was down 43% YoY to Rs149mn on account of aggressive deleveraging and decline in interest rate.

* In H1FY22, the company incurred capex of ~Rs300mn for debottlenecking and upgrading of grinding unit in Devapur which was commissioned in early Sep’21. The company expects to end FY22E with total capex of Rs500mn. Further, it expects to incur capex of Rs2.5bn in FY23E towards cement grinding unit in Tiroda and WHRS.

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