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In?line with industry trend; reducing price gap with peers to improve margins

Result Synopsis

Orient Cements (ORCMNT) reported weak performance on account of seasonal weakness with escalated cost. Revenue was flat y/y, but declined by 14% q/q as erratic rainfall in core markets moderated volumes by 3% y/y and 10% q/q. NSR remained up by 4% y/y but seasonal correction caused a decline of 4% q/q. Total cost surged by 26% y/y and 6% q/q   dragged EBITDA/te by 75% y/y and 65% q/q to Rs263/te (Rs326mn). Therefore, owing to muted operating profit, ORCMNT posted a net loss of Rs95mn. Considering the subdued volume performance in Q2FY23, we reduced the FY23 volume estimate to 5.5MT (earlier 5.7MT) lowered revenue estimate by 4%.    Ongoing expansion project of 3MTPA in Maharashtra & Telangana would take total capacity to 11.5MTPA by FY24E. This expansion will enhance the access to Chhattisgarh, Maharashtra & South MP markets and thereby diversifying its geographical presence with higher blended sales & enabling logistical optimization. Management emphasized that they focus on better pricing rather than higher dispatches as would be vital to offset cost inflation and improve the margins going forward. However, as we factored the Q2FY23 performance coupled with fuel price resurgence (Pet coke +$200/te v/s +$160/te in Sep’22), the EBITDA/PAT estimates moderated by 26/31% for FY23E, while FY24 estimates remain intact. Despite being amongst the low?cost producer, ORCMNT has significant headroom to improve on its efficiency parameters further: 1) Product?mix (Higher Blended Sales), 2) Augmenting Green Power 3) Higher use of alternative fuel 4) Targeting Average TSR of 25% by 2030. ORMNT is expected to generate a CFO of Rs8bn over FY23?24E that would partially fund its ongoing CAPEX of Rs18bn, while the rest to be funded through debt. Hence, Net Debt is expected to peak at ~Rs13bn with net debt/EBITDA of 1.7x by FY24E. We retain our BUY rating with a revised TP of 194, valuing the stock at 7x EV/EBITDA on FY24E.

Result Highlights

* Volume decline of 3% y/y and 10% q/q to 1.2MT as heavy rains & flooding in core markets impacted trade volumes. However, NSR improved by 4% y/y but declined by 4% q/q translates into flat y/y revenue of Rs6.15bn but declined 14% q/q.

* Total Cost/te witnessed a sharp uptick of 26% y/y and 6% q/q on account of surge in RM/power by 44/49% y/y (+52/?6% q/q respectively).

* NSR increase by 3% y/y was inadequate to offset the cost surge of 26% y/y declined EBITDA/te by 74% y/y to Rs263/te, while sequentially NSR fall of 4% with 6% cost escalation dragged EBITDA/te by 65%.

* EBITDA declined by 76% y/y and 68% q/q to Rs326mn, whereas the EBITDA margin contracted substantially to 5.3% Q2FY23 v/s 21.9% in Q2FY22.

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