Orient Cement - Profitability reset at higher level - ICICI Securities

Orient Cement's (ORCMNT) Q1FY22 EBITDA at Rs1.86bn (up 90% YoY) was ahead of our and consensus estimates led by better realisation, up by a sharp 13% QoQ (and 1.4% YoY). Accordingly, EBITDA/te grew 25% QoQ and 14% YoY to a decade-high of Rs1,368/te (I-Sec: Rs1,234/te). Management is targeting commissioning of 3mnte Devapur expansion at a capex of Rs16bn in FY24. Net debt further reduced by Rs1.3bn in YTD-FY22 to
- Revenues increased 68% YoY to Rs6.9bn on a low base (I-Sec: Rs6.6bn). Realisation/te was up 13% QoQ (1% YoY) to Rs5,076/te (I-Sec: Rs4,854/te) aided by sharp price increase in its core markets and product mix change. In Q1FY22, premium products contributed 8% of the trade sales volumes. In Feb'21/Mar'21, prices started to witness some softening, which reversed in May'21. Overall blended cement sales (PPC + StrongCrete) comprised ~70% of total sales in Q1FY22. Volumes were up 66% YoY on a low base to 1.36mnte implying 68% utilisation.

- Maintains 20% YoY volume growth guidance in FY22 with volumes at 6mnte: Management indicated that Q2FY22 volumes are likely to be at similar levels as Q1FY22 with sequential improvement likely in Q3FY22 and Q4FY22 over the previous quarters. There has been some pressure on pricing in Q2FY22-TD (decline of Rs10-15/bag from Q1FY22 exit). On the cost front, management expects H2FY22 to witness some reduction.

- EBITDA increased 90% YoY to Rs1.9bn (I-Sec: Rs1.7bn) with EBITDA/te rising 14% YoY to Rs1,368/te (I-Sec: Rs1,234/te) owing to higher realisation and lower costs. Total cost/te increased 9% QoQ and declined 3% YoY at Rs3,708/te. Raw material plus power and fuel costs/te rose 8% QoQ on account of higher fuel and flyash prices and cost of transferring clinker. In Q1FY22, coal comprised 77% (of which 70% is domestic coal and 30% is imported) of the fuel mix, with petcoke at 12% and alternate fuels at 11%. Freight cost/te increased 5% QoQ and 13% YoY owing to higher diesel prices and packing cost. Other expenses/te rose 12% QoQ owing to higher shut-down costs. Finance cost during Q1FY22 was down 41% YoY to Rs159mn on account of aggressive deleveraging and decline in interest rate.

- 0.5mnte debottlenecking at Devapur is in final stages and it is likely to get commissioned by Q3FY22. Government clearances for 3mnte Devapur expansion project at a capex of Rs16bn have been received and the management is hopeful of being able to commission the same in FY24. Rajasthan project is still awaiting necessary regulatory approvals.

Key takeaways from conference call

- Strong momentum of Q4FY21 continued for the first two weeks of Apr'21 post which the demand environment got impacted on account of covid second wave, which resulted in lockdowns and restrictions on business timings. Onset of monsoon also impacted performance in Q1FY22.

- Company reported 66% volume growth YoY in Q1FY22 whereas the industry grew 53% YoY. However, in Q1FY21 the addressable market for ORCMNT was hit more than the industry average, hence its growth looks optically higher than that of the industry (on account of low base).

- Operating costs have been sequentially higher primarily due to maintenance cost and cost of transferring clinker. Cost of a single maintenance activity stands at Rs100mn-120mn. On account of shutdown of thermal power plants, the company had to procure fly ash from power plants located much further away. Cost of Jalgaon plant fly ash (the cheapest) increased significantly during the quarter.

- ORCMNT has yet not placed order for equipment pertaining to setting up of WHRS. The total capex for the WHRS plant stands at Rs600mn-700mn of which Rs200mn is expected to be invested in FY22 and the balance in FY23. The project is likely to get completed within 10 months of placing order. Other capex in FY22 is likely to be ~Rs400mn-500mn (not including capex pertaining to WHRS).

- Government clearances for 3mnte Devapur expansion project at a capex of Rs16bn have been received and the management is hopeful of being able to commission the same in FY24. By FY24, the company plans to take the existing 8mnte capacity to 11.5mnte which is subsequently expected to increase by 3mnte in two years to reach 14.5mnte by FY26. Capex required to increase the capacity by 3.5mnte is Rs16bn. The capex of Rajasthan project has not been built in. If the necessary approvals for the Rajasthan project come in, then it will have priority over Chittapur expansion. The capex curve going from 8mnte to 14.5mnte will entail capex of Rs36bn, which will be partly (50%) funded through internal accruals and remaining by debt. Company would maintain its broad guidance of debt/equity to not exceed 1.5x and debt/EBITDA to not exceed 3x.

- 0.5mnte debottlenecking at Devapur is in final stages and it is likely to get commissioned by Q3FY22. Rajasthan mine is in the process of getting regulatory clearances. Reserves in those mines are expected to be 100mnte.

- Domestic petcoke prices have increased by Rs1,300-1,400/te at the start of Aug'21. Due to this increase, most players are likely to shift to coal. Petcoke contribution in the fuel mix is likely to decrease even from the current levels. The current spot rate of international coal stood at US$100/te and petcoke at US$170/te. Company has coal inventory for the next few months, which it stocked up during Q1FY22.

- StrongCrete has good demand in North Telangana, Jalgoan, North Karnataka, etc. In several markets, sales of StrongCrete is in excess of 15-18% of B2C sales.

- The rail:road mix for Q1FY22 stood at 22:78.

- Clinker conversion ratio in Q1FY22 stood at 1.42 vs 1.33 in Q4FY21 and 1.36 in FY21.

Shares of ORIENT CEMENT LIMITED was last trading in BSE at Rs. 158 as compared to the previous close of Rs. 158.85. The total number of shares traded during the day was 24579 in over 869 trades.

The stock hit an intraday high of Rs. 162.25 and intraday low of 155.55. The net turnover during the day was Rs. 3901285.

Source : Equity Bulls

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