MOSL: ORIENT CEMENT (Buy)-Demand trends muted but better realizations drive margins
Orient Cement: Demand trends muted but better realizations drive margins
(ORCMNT IN, Mkt Cap USD0.3b, CMP INR99, TP INR125, 26% Upside, Buy)
- Volumes decline but pricing improves…: Volumes declined 6% YoY to 1.5mt in 1QFY20. However, realizations increased 14% YoY (+11%QoQ) to INR4,552, led by strong pricing in underlying markets. Revenue grew 7.5% YoY (-8% QoQ) to INR6.8b (in-line).
- …driving margins improvement: Cost/t increased 3% YoY (+9% QoQ) to INR3,562/t, as freight cost/t inched up 6% YoY (+8% QoQ), primarily due to higher lead distance as ORCMNT attempted to garner sales from better-realization markets. Other expenses/t rose 12% YoY (+25%QoQ) due to operating deleverage. However, led by healthy realizations, EBITDA/t increased 86% YoY (+18% QoQ) to INR990, resulting in EBITDA of INR1.5b (+75% YoY; our estimate: INR1.4b). Margin expanded 8.5pp YoY (+1.4pp QoQ) to 21.7%. Tax rate was at 35.5% v/s 40.5% in the year-ago period. PAT stood at INR559m in 1QFY20 (our estimate: INR454m; 1QFY19: INR160m).
- Key highlights from management interaction: (1) Product mix kept shifting toward OPC due to higher sales to the projects and non-trade segment. (2) Average distance travelled increased to marginally above 300km but facilitated better price realization.
- Valuation view: We cut our volumes estimate for FY20 by 2% to factor in our lower growth assumption for the south market (we expect demand growth in its key AP/Telangana market to remain flat v/s +2-3% earlier). However, we increase our realization estimate for FY20 in view of the recent price hikes. Thus, our net sales and EBITDA estimates remain unchanged for the year. For FY21, we cut our volume estimate by 5% given that the plans to put a grinding facility in Devapur have been deferred from FY20 to FY23. As a result, we cut our FY21 EBITDA estimate by 10% and PAT estimate by 5% (due to lower depreciation expense). The stock trades at 5.8x/5.1x FY20/21E EBITDA. We value ORCEMT at 6x June'21E EV/EBITDA and arrive at a TP of INR125 (implied EV/tonne of USD55 on FY21E capacity). Buy.
Orient Cement Limited is an India-based company engaged in the manufacturing and sales of cement. The Company's products include Birla A1 Premium Cement, Birla A1 Premium Cement-OPC 53 Grade and Birla A1 Premium Cement-OPC 43 Grade. The Company's product mix includes ordinary Portland cement (OPC) and Pozzolana Portland cement (PPC), which are sold under the brand name of Birla A1. The Birla A1 Premium Cement is an inter-grinding of Portland cement clinker, gypsum and fly ash. The Company is part of the CK Birla Group. The Company's manufacturing facilities are located at Devapur in Telangana, Jalgaon in Maharashtra and Chittapur in Karnataka. The cement production capacity of the Devapur plant is approximately three metric tons per annum (MTPA). The Company operates a clinker grinding plant in Jalgaon, Maharashtra of approximately two MTPA cement production capacity.
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