I-direct Instinct - Orient Cement

Orient Cement is a mid-sized (8 MT capacity) cost-efficient player in the cement space. Its self-sufficiency in power (95 MW), ability to switch between fuels (pet coke, coal), lower lead distance and proximity to key raw materials like limestone, coal as well as end-market have helped it to maintain its cost leadership in the industry. It is reckoned to be one of the most efficient players in terms of cost of production. The company has weathered tough times in the past without diluting its balance sheet. Its presence in rural centric markets in Telangana, Maharashtra and Karnataka will provide key support to its earnings in the current challenging environment. In addition, shifting focus towards debt reduction will strengthen its balance sheet further. With expectations of demand recovery post end of monsoon in its key markets, firm pricing in the south along with focus on cash conservation through deferral of major capex, we expect liquidity and B/S strength to improve. In turn, this should lead to re-rating of the stock. Hence, its current valuations at EV/tonne at $40/tonne and EV/EBITDA of 5.4x (FY22E) make it an attractive play in the cement space.

Triggers

Performance set to improve sharply from FY22E onwards

Orient Cement majorly derives revenues largely from Maharashtra, Telangana and Karnataka markets. A revival in these markets, particularly Maharashtra and Telangana, would help the company improve its performance better. Key factors driving cement demand over FY20-22E are: a) strong rural demand, b) irrigation projects, c) housing projects in AP/Telangana and infrastructure projects like metro in Mumbai-Pune, Mumbai-Nagpur Expressway, etc. Also, the pricing environment, especially in the south, has improved sharply over the past nine months, which would lead to better revenue and margins, going ahead. While FY21E revenue is expected decline 9% due to ongoing pandemic, we expect strong traction in growth from FY22E onwards with likely revenue growth of 26% led by a pick-up in infra activity supported by a disciplined pricing environment.

Proximity to raw materials, market provide structural cost advantage

The company's plants are located close to key raw materials like high quality limestone and coal reserves. Also, the company's product mix is skewed in favour of PPC (FY20 PPC sales at ~57%), thus enabling higher use of fly ash, resulting in lower raw material cost per ton. Further, lead distance has been ~300 km, indicating products being sold in nearby areas. This has helped the company to keep raw material and freight cost far lower than the industry average. The total average cost of production is Rs. 3,515/tonne, which is one of the best in the industry after Shree Cement.

Focus on debt reduction to strengthen b/s further

Net debt for FY20 was at Rs. 1101 crore, which is mainly a part of the remaining debt (Rs. 1300 crore) that the company raised for expansion of Chittapur plant in FY15. During FY20, the company repaid Rs. 94 crore. We expect the debt to further reduce by Rs. 100 crore over the next two years. This, in turn, will bring down debt/equity to much comfortable levels of 0.8x.

Valuation & Outlook

The strong management pedigree, structural cost advantage and presence in rural centric market (least affected by Covid) remain key positives of the company, which will guard its earnings in the current uncertain times. At the CMP, the stock is available at attractive valuations of 5.4x on FY22E EV/EBITDA. With the company's focus on strengthening b/s, we expect a re-rating of the stock, going forward, with resumption of economic normalcy.

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirectInstinct_OrientCement_Oct20.pdf

Shares of Orient Cement Ltd was last trading in BSE at Rs.60.8 as compared to the previous close of Rs. 60.55. The total number of shares traded during the day was 33639 in over 484 trades.

The stock hit an intraday high of Rs. 62.35 and intraday low of 60.5. The net turnover during the day was Rs. 2067658.

Source : Equity Bulls

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