Orient Cement - Optimism around demand recovery - ICICI Securities

Key takeaways from Orient Cement's (ORCMNT) management concall hosted by us include: (i) cement demand rebounded in Sep'20 with further improvement in Oct'20 led by pick-up in non-trade demand; (ii) IHB demand was impacted by heavy monsoon in Q2FY21 and is likely to recover post Diwali; (iii) management guided for volumes at 5mnte in FY21 implying ~80% utilisation during H2FY21; (iv) net debt declined by Rs2.2bn in H1FY21 to Rs9.3bn aided by better profitability and working capital release; (v) the company is planning to add 10MW WHRS at a capex of Rs1bn by FY22. We maintain our FY21E-FY23E estimates with the target price unchanged at Rs93/share based on 6x Sep'22 EV/E. Valuations at EV/te of
- Optimism around demand recovery: ORCMNT saw YoY growth in volumes in Sep'20 with further improvement in Oct'20 led by pick-up in non-trade demand. The share of trade sales declined from 75% in Q1FY21 to 60% in Q2FY21. As demand from infra segment increased pushing demand of OPC; the share of PPC fell 500bps QoQ to 60% in Q2FY21. Demand from IHB has been impacted in the company's key markets owing to heavy monsoon; it is likely to recover post Diwali. Similarly, government spending on infra & low-cost housing is also expected to improve in H2FY21 with return of migrant workers. Accordingly, management guided for volumes at 5mnte in FY21 implying 3% YoY growth and ~80% utilisation in H2FY21.

- Costs may normalise in H2FY21 vs sharp reduction seen in H1FY21: Pre-Covid salaries for senior management team have been reinstated from Oct'20, given optimism around demand / price recovery. Shutdown / maintenance costs have been shifted to Q3 and Q4 this year vs Q2 and Q3 last year. The usual ad and marketing spends are likely to be incurred in H2FY21 to improve brand visibility. Company may partially switch to coal given sharp rise in petcoke prices.

- EBITDA to OCF conversion was strong at 125% in H1FY21. ORCMNT generated FCF of Rs2.4bn post working capital release of Rs1bn and capex spend of Rs176mn. ORCMNT has repaid its debt obligations till FY22. Accordingly, net debt has declined by Rs2.2bn to Rs9.3bn as of Sep'20. Management is targeting 'net debt to EBITDA' to reduce to 2x by Mar'21 (vs 3x in Mar'20).

- May revive capex on WHRS; expansion capex still some time away: ORCMNT is still in the process of acquiring various government approvals / land for its Devapur expansion projects. Any decision on expansion is likely to depend on demand recovery and comfort on leverage. Besides, the company is looking for cost-saving projects such as 10MW WHRS at a capex of Rs1bn. We factor-in capex of Rs5.7bn in FY23E and expect 'net debt to EBITDA' to remain at <3x over the next few years.

Shares of Orient Cement Ltd was last trading in BSE at Rs.64.8 as compared to the previous close of Rs. 66.25. The total number of shares traded during the day was 137317 in over 1651 trades.

The stock hit an intraday high of Rs. 69.3 and intraday low of 63.85. The net turnover during the day was Rs. 9131249.

Source : Equity Bulls

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