Orient Cement Limited --- Favorable Reward May Be Possible

CMP: Rs. 138/-; Market Cap: Rs. 2835 Cr ; Total Debt : Rs. 1300 Cr; Total Capacity: 8 Million Ton at present and going to go up to about 11 MT ton by end of 2018.

I look into Cement sector companies when earnings are depressed for a company who has established capacities and capabilities for itself and running at low capacity utilization; having easy availability of raw materials at close proximity to the plants;, have captive power plants and low transportation cost to reach end customers vis a vis it’s neighboring competitors. Second level parameters to check are macros… Like if we are getting into lower interest rate cycle, if the sectoral tailwind is available for the infrastructure and housing sector and if the company is having new capacities coming on stream when demand pick up and price pick up is highly likely. Added to these possibilities we find two more general characters of successful Cement play which are critical to benefit the industry biggies … No significant new capacity in the greenfield are expected to come on stream in coming 3 - 4 years in the market catered by target companies and a large production capacity across geography which can withstand sudden local adverse developments which can sqeeze volume or margin in a specific state or geography like sudden flood, political disturbance or election or other local issues.

Orient Cement, the C K Birla Group company has 8 million total capacity ---- 3 million integrated plant in Adilabad in AP; 2 million grinding unit in Jalgaon in Maharashtra and new 3 million integrated plant in Gulbarga, Karnataka. Post acquisition of 74% stake in Bhilai Jaypee Cement Limited (BJCL) and Nilgrie Grinding unit from Jaypee Power venture Venture Limited would subsequently increase the theoretical capacity to 11.5 MT soon. It would also make Orient Cement a formidable pan India player.

Presently, the old two plants are running at capacity utilization of about 58% with poor realization . The reasons for poor performance are manifold … Rain in the manufacturing area in AP resulted in a lower sale and higher power and fuel cost due to wet coal usage; closure of power plants in Jalgaon Area of Maharashtra substantially reduced availability to Fly Cash in Jalgaon plant resulting in lower sales and higher freight cost for bringing Fly Ash from distant location to run the plant. The newest plant in Chttapur, Gulbarga, is running at below 50% as it is not yet fully commissioned. We can expect at least 2.1 MT sales from here in FY 18. In FY 17, total sales from here can be at most 1.4 MT. But for last two months power plants in Jalgaon resumed operation and post monsoon, we can hope wet coal issue may not be there and also the company commissioned a new stacker reclaimer which would reduce the problem.

The acquisitions of two new plants are value accretive. The BJCl plant consists of 1.1 MT of clinker, 2.2 MT of grinding (with committed slag availability from Bhilai Steel Plant) and 2 MT grinding capacity with Jaypee Power Venture unit assuring ready availability of Fly Ash. The acquisition of 74% stake in BJCL would cost Rs. 1450 Cr and purchase of Nilgrie Grinding unit would cost Rs. 500 Cr. Both together seems to be bought at a good price of US$ 98 / Ton which compares well with recent purchases apart from Sagar Cement purchase of BMM Cement which was stuck at US$ 78 / Ton. The cost of grinding unit was one of the very competitive for recent time at only US$ 35 / ton and almost same as the price paid by Shree Cement even though Shree bought a lower capacity plant.

We feel, the price of cement and growth of cement demand would likely to be high for coming few years especially in Eastern, Central, Southern and Western Region where in one year time, the orient Cement capacities would be fully available post integration with Jaypee plants.

Historically Orient Cement is an efficient producer and having a good track record with 2700 + dealer network across its target geography. But the sluggish demand recovery has depressed its financials in recent time.

The balance sheet is bloated due to recent capacity expansion and may further bloat due to Jaypee deal of about Rs. 2000 Cr. We expect, it may raise loan of another Ts. 650 Cr and also may raise a QIP for the balance amount.

However, three likely trigger can work in it’s favor … New capacities going on stream, demand pick up in the target geographies and better price realization due to demand and consolidation of suppliers and absence of new capacity.

We feel net sales volume, realization and EBITDA / Ton to grow significantly in coming two years and with reduction im interest rate, we feel the overhang of high level of borrowing may not be detrimental to interest of minority investors.

The ROE generated by Orient in better times were in the range of 30% … If things go as per way we are projecting, by next two years, unless significant dilution takes place, ROE can climb back to previous level or in its vicinity from current abysmal low level of 7.5%. But these turnaround times provide best risk adjusted upside scenario for a new investor.

Views invited.

Mandatory disclosure: The author is SEBI registered investment adviser and NISM certified Research analyst and runs investment advisory firm https://aveksatequity.com. The author is invested in the stock and advised the members of his website to buy it at a lower price level than current price. No trading has been done in the stock in last 30 days by the author or his family members or business associates. This is neither a recommendation to buy or sell or hold the stock. This discussion is purely for analysis purpose. Please do your due diligence before making any decision to invest or seek help from your SEBI registered investment adviser. .

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Few questions…
1.EV/TONNE calculation of orient Cement ltd.?
2. When will bhilai N nilgrie plants will resume?

@aveekmitra bhai -

Projected capacity - 11.5 MTPA
Current Market Cap - 2600 cr
Debt - 1300+2000 cr,

EV ~ 6000 cr

Thus, valuation per ton ~ 80 USD. This ain’t very cheap seeing all the debt it has accumulated over time and due to these acquisitions.

Value will emerge as they start paying their debt with increased capacity utilization, which is still some time away.

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Orient Cement looks interesting for long term investment @ CMP Rs.160.25
Veteran stock picker Mudar Patherya also now Recommended Orient Cement.
From Quick look in screener.in , I find more Positive than -ve on the stock …

Positives:

  1. Operating Profit improved from 12.66 % to 20.57 % ,2) Yerarly loss to Yeraly profit ,3) Improved cash flow
  2. Share didn’t participated in recent market rally

Negatives: 1) Promoter holding: 37.50%
Disclosure : Not Invested. Planned to invest tomorrow.

Any one attending AGM today? Announcement on rights issue is likely today.

I saw an interview with the management, where they said that they have done 2.7 mn tons sales in H1. The expected figure for H2 is 3.3 mn tons. H1 was weak due to rain and EBIT per ton was 600 rupees, whereas in H2 it is expected to touch Rs. 800. The total sales for the year of 6 mn tons will be a capacity utilisation of 75 pc.

The JP acquisition is taking time and so has helped in terms of cash flow generated over the last 3 qtrs (200 crs). Every quarter cash flow of 70 cr is helping the company to accumulate resources for the JP acquisition.

Looking good but with a 3 year view.

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Orient cement came out with Q4 results today.
https://archives.nseindia.com/corporate/SEUPLOADOutcomeofBM17052021_17052021180621.pdf

My observation

  1. Operating Cash flow for FY21 has increased from 714 Cr. from about 291 Cr.
  2. Company has repaid the debt of about 400 Cr. That is about ~35% of total debt.

Hi @hitesh2710 - if you can please share your findings on the results.

Orient cem has come out with good results as have most cement companies. Y on Y, for q4, Topline has grown nearly 26%, and operating profit has more than doubled from 70 crores to 153 crores. Net profit too has grown from 44 to 99 crores which is a significant jump. Part of the benefit is due to operating leverage and there might be some raw material cost benefits too it seems.

Debt reduction is a welcome step. I think if going ahead, company does not have too much capex lined up, it can generate decent free cash flows. If company can keep up the momentum in sales and profits going forward too, it looks attractive at current levels.

Technically, above 124, it will cross its previous significant peak posted in May 2019 and hence will post fresh 2 year high. 160 remains the 61.8% retracement level of its entire fall from 232 to 35.

Stock price has made consistent higher tops and higher bottoms ever since it bottomed out at 35 levels. There is a semblance of rounding bottom formation also which seems a good pattern.

For me this has been a techno funda bet especially having looked at the numbers reported by cement companies prior to this one.

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Listened to the q4 fy 21 concall today.

Some salient points:

Company has guided for 20% growth in volumes to 6 million tons.
Debt reduction is on track and by end of FY 22, company might end up with marginal debt of 100-200 crores, from current levels of 650 cr net debt.
Current capacity of 8.5 million tons to be taken up to 11.5 million tons with capex details of which will be shared in due time. Funding likely to be 50-50 between internal accruals and debt.
Premium product sales percentage in overall sales has gone up to the aspired level of 10%.
First 6 weeks of FY 22 have not been too bad as compared to those of FY 21 as there was total lockdown in that period.
Company has continuously worked on cost optimisation at all fronts during the past year.
Demand in q4 fy 21 was unprecedented and in last few weeks of March company worked at full capacities and still could not meed the demand.

Overall quite encouraging commentary in terms of the direction the company is going. The CEO Mr Khetarpal came across as a person who gave most answers in details and actually gave the complete picture regarding his company and its progress in opening statement itself.

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Report from Arihant capital on Orient Cement.

Disc - Invested

Q4 result for Orient cement

Key observations for me-

  1. Their borrowing(short term/long term combined) have almost halved during this year
  2. The above reflects in their interest cost being half in FY22 vs FY21.
  3. Power and Fuel cost in FY22 increased by about 33% vs FY21, compared to revenue increase of 16%.

Company appears to be in sound financial situation compared to same time previous year.

Disc-Invested

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Orient cements imp points annual report FY22.docx (2.4 MB)
Key triggers: (Other imp points and comments from AR & Con call in document) (Mcap -2300Cr)

  1. Currently sector is facing headwinds, with infrastructure demand to pickup can be good time to allocate in this space. Current P/E 8.5 against 5 year median of 16.2 despite PAT becoming 6x.
  2. Sector growth is generally 1.1x of of GDP
  3. Promoter has recently purchased stake from open market & increased stake to 37.90% from 37.30%. (Price 115-118)
  4. Harimohan Bangur MD Shree Cement has increased his stake in Apr 2021 from 1.03% to 1.59% (Avg price 96)
  5. Cost of its assets (capacity) is about $ 45 per tonne, where as replacement cost of creating similar asset as on date is $ 100 per tonne.
  6. Gross borrowings have reduced from 1226 CRS in March 2020 to 316 CRS in March 2022, even despite headwinds in sector. Most of repayment is prepayment in nature.
  7. Looking to expand capacity by 3.5 MTPA till FY25 from 8MTPA now.
  8. Mines at the time of demerger in Rajasthan might come back to company, most probably outcome should be in favour in CY. This will allow company to enter Rajasthan market with a strategic advantage.
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