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Healthy margins maintained…

About the stock: Orient Cement is a mid-sized (8.0 MT) cost-efficient player in cement space. Its cement plants are 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.

Q1FY22 Results: The company reported better results with EBITDA margin expansion of 250 bps QoQ despite 9.1% QoQ increase in cost on a per tonne basis.

* Revenues were down 17% to | 690 crore, led by sales volumes de-growth of 26.4% to 1.36 MT due to lockdown. YoY, revenues were up 68%

* EBITDA/t was up 24.4% QoQ to | 1362/t (vs. last quarter (LQ) EBITDA/t of | 1095/t). EBITDA margin was at 26.9% vs. 24.4% LQ and 23.9% last year

* PAT of | 89 crore was down only 11% QoQ due to better margins.

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 business outlook, we remain positive on the company and maintain our BUY rating

Target Price and Valuation: We value the stock at | 250 i.e.6.5x FY23E EV/EBITDA.

Key triggers for future price performance:

* The company is planning a significant debt reduction from strong operating cash flows in FY22E before moving into the next phase of expansion

* To reach 14.5 MT cement capacity by FY26E with an eye on Rajasthan market with total capex of ~| 3,600 crore

* Likely transfer of mines in Rajasthan from Orient Paper to the company post favourable changes in the MMDR act to 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.

Alternate Stock Idea: Apart from Orient Cement, in our cement 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 | 1700/share

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