Orient Cement - Better days ahead - ElaraCapital

We recently hosted a roadshow with management of Orient Cement (ORCMNT IN). The following are the key highlights:

Profit improvement on better NCR and volume

Naked cement realization (NCR) of Orient Cement in key markets has improved by INR 50-100/tonne compared to the past quarter (INR 2,300/tonne). Volume for the quarter improved both QoQ and YoY. The company is currently operating at 100% capacity utilization. Thus, it targets volume of 1.2 mn tonnes (~8% YoY) in Q4FY14. Margin is also likely to get a fillip, due to positive impact of operating leverage.

Greenfield project on track

Work on the proposed 3-mn-tonne Greenfield project at Gulbarga in Karnataka (clinker capacity of 2.6 mn tonnes) is underway. Major equipment suppliers for the projects are FL Smith, Thaison and L&T. Commissioning is slated by the end of FY15. Capex of INR 17.2bn is to be funded through a mix of debt (INR 12bn) and internal accruals. The company has already invested INR 3.5bn through internal accruals. Financial closure has already been achieved. The project also includes a 45-MW thermal plant, a 7-MW waste-heat recovery plant and a railway line. It will be eligible for investment allowances that were announced in the Union Budget of 2013. Thus, post commissioning of the project, the company is likely to go under MAT.

Expanding geographical presence

Post commissioning of the Gulbarga plant in Karnataka, the company intends to serve Karnataka, West Andhra Pradesh and Maharashtra. As additional supply would be available from existing plants at Devapur (AP) and Jalgaon (Maharashtra), it would service new markets, such as Gujarat, Madhya Pradesh and Chhattisgarh.

Targets to reach 15 mn tonnes by 2020

Orient Cement also has applied for licenses to mine limestone in Rajasthan with the intent to set up a 2-mn-tonne Greenfield plant. However, work on the project would be undertaken only after the completion of the Gulbarga plant. Apart from this, the company is evaluating setting up grinding facilities to capitalize on surplus clinker capacity. It will also consider mid-size M&A opportunities.

Valuation – reiterate Buy

At a CMP of INR 39, the stock trades at an EV/tonne of ~USD 51 on FY15E capacity. We expect earnings to improve in Q4FY14, due to the increase in NCR in the key markets. Thus, taking into account improvement in earnings, attractive valuations, cost efficiency and healthy return ratios, we reiterate our Buy rating with an unchanged TP of INR 50.

Source : Equity Bulls

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