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CAPEX to drive into new league

Result Synopsis

Orient Cement's (ORCMNT) result came largely in-line with our estimates. Volume/NSR grew by 15% & 2% y/y resulted in revenue 17% y/y in Q2FY24. Unexpected fall in RM cost/te by 23% y/y led total cost/te to decline by 6% y/y during the quarter. As a result, healthy NSR with eased cost translates to EBIDTA/te of Rs607 against Rs263 in Q2FY23. EBITDA came in at Rs865mn, registering a growth of 166% y/y, whereas PAT came to Rs246mn against net loss of Rs95mn in Q2FY23. Now management prioritized the Chittapur expansion (3MTPA cement & 2MTPA clinker) to improve the production headroom as the unit has only one kiln running on 100% utilization. Furthermore, the company plans to add 3MTPA clinker & 1MTPA GU at Devapur to cater the 2MTPA of GU in Madhya Pradesh by FY25E. Management guided +12% y/y volume growth to 6.5MT for FY24E and reiterates its policy to focus on better pricing over higher dispatches to improve the margins.

We remain POSITIVE on ORCMNT for being an efficient & low-cost producer and believe it has a significant headroom to improve further through 1) Product-mix (Higher Blended Sales), 2) Augmenting Green Power 3) Higher use of alternative fuel (TSR of 25% by 2030). ORMNT to generate a OCF of Rs10bn over FY24-26E which would partially fund its CAPEX of Rs25-30bn over FY24-26E. Therefore, Net Debt is expected to rise going forward, limiting the earning visibility (Net Debt/EBITDA guidance of <3x). Hence, we believe a strong pricing environment will be vital for ORCMNT to achieve better profitability and reduce its dependency on borrowings. At CMP stock trades at 11/9x EV/EBITDA on FY25/26E. We rolled forward our estimates to FY26 and arrived at TP to Rs216/share, valuing at 8.5x EV/EBITDA on FY25E with NEUTRAL rating.

Result Highlights

 In-line Volume growth of 15% y/y to 1.4MT with NSR growth of 2% y/y resulted in +17% y/y revenue growth in Q2FY24 

As expected, the total cost/te declined by 6% y/y resulted in EBITDA to Rs607/te up by Rs344/te y/y in Q2FY24. 

EBITDA came in at Rs865mn up by 166% y/y with EBITDA margin of 12% in Q2FY24 v/s 5.3% in Q2FY23 

PAT came at Rs246mn in Q2FY24 as compared net loss of Rs95mn in Q2FY23. 

Trade volumes were higher sequentially and lower on annual basis. Share of blended cement improved sequentially and flat on annual basis.

KEY CON-CALL HIGHLIGHTS

Cement demand in Aug’23 was strong as compared to Sep/Oct’23 aided by infra projects, while cement prices largely remained flat during the quarter. 

From Sep’23, company seen cement price increase of Rs20/te 

Western market (Maharashtra) volume share was 62% in Q2FY24, whereas South/Central contributed 27/10% in Q2FY24.

Management reiterates cement volume guidance of 6.3-6.5MT in FY24E 

Trade share was 50%, wherein blended cement share was 59% for Q2FY24 

Management plans to increase premium cement share to 25% by FY24 exit. (Rs25-45/bag higher than PPC). 

Devapur (Coal) Kiln fuel cost was at Rs1.8 kcal/kg, whereas the Chittapur (Pet coke) Kiln fuel cost was at Rs2.15 kcal/kg in Q2FY24. 

Power cost remained elevated due to increase in grid power prices by the state government 

Management procured new inventory at $131/te which will reflect partially in Q3FY24 and rest in Q4FY24 

From Q4FY24, management indicated Rs60/te of cost saving through 10MW of WHRS capacity.

Management targets to maintain 1.5x D/E and ~3-3.5x of Net Debt/EBITDA

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