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Strong b/s to help withstand near term challenges…

About the stock: Orient Cement is a mid-sized (8.0 MT) cost-efficient player in the cement space. Its cement plants are located in Devapur, Telangana (3 MT integrated), Chittapur, Karnataka (3 MT integrated), Jalgaon, Maharashtra (2 MT grinding unit).

* The company derives revenues largely from Maharashtra (50%), Telangana, Karnataka and MP markets

* It also has 101 MW power plant (95 MW CPP, 6 MW WHRS) that makes it selfsufficient in terms of power requirements

Q4FY22 Results: Orient Cement reported improved performance during Q4FY22.

* Net revenue increased 30.2% QoQ (down 3.3% YoY) to | 803.9 crore. Volumes were up 33.1% QoQ to 1.62 MT (down 12.4% YoY on high base). CU was at 81% vs. 93% last year and 61% last quarter

* Despite 56% QoQ jump in fuel costs, margins broadly remained stable at 19.1% QoQ

* With a sharp decline in interest costs (down ~69% YoY, QoQ), net profit improved 67.6% QoQ to | 73.2 crore. However, PAT was down 26.7% YoY

What should investors do? Orient Cement’s share price has grown only 46% over the past three years (from ~| 115 in August 2018 to | 167 in July 2021).

* With a strong balance-sheet, the company is now in a better position to withstand the cost challenges

Target Price and Valuation: We value Orient at | 150 i.e. 6.0x FY24E EV/EBITDA.

Key triggers for future price performance:

* The company is targeting to reach 14.5 MT cement capacity by FY26E in the next phase of expansion with an eye on the Rajasthan market

* The company aims to commission (2 MT grinding unit in Maharashtra and 2 MT clinker line with 1-1.5 MT grinding unit at Devapur, Telangana by Q4FY24E. Likely transfer of mines from Orient Paper to the company post favourable changes in the MMDR Act may speed-up expansion in Rajasthan

* Close proximity to raw materials, higher share of blended cement (PPC), lower lead distance to keep production costs lower than industry average

* WHRS plant of 10 MW in Chittapur should be operational in FY23

Alternate Stock Idea: Apart from Orient Cement, in our cement sector coverage we also like another south based player Sagar Cement.

* Another low cost producer, expanding footprint in east/central region

* BUY with a target price of | 265/share

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