Stock To Buy: Cement Company That Is Reducing Debt, Showing Solid Performance

Orient Cement has put-in a splendid performance for the quarter and is reducing its debt as well. Broking firm, Anand Rathi has a buy call on the stock of Orient Cement.

Good financial performance

In the high-cost milieu and heavy and unseasonal monsoon, Orient's performance was much better than its peers, although its EBITDA/ PAT fell 14%/19% y/y (on a high base).

"While de-levering continues, the company has attractively financed the balance debt. Cost optimisation measures, a rake-handling system, the WHRS setup and solar power are positives. We retain our Buy rating, with a slightly lower target of Rs.233 (earlier Rs.240) on 7x FY24e EV/EBITDA," Anand Rathi has said.

Volumes take a hit in line with the industry

According to Anand Rathi, Cement volumes declined 10% y/y to 1.22m ton. The company maintained its market share in its prime region; the decline came from far-off un-remunerative markets. This was also visible in better realisations than peers'.

"Overall revenue registered 2% growth y/y to Rs6.17bn led by the strong rise (14% y/y) in realisation/ton to Rs5,070. For FY22, the company targets cement sales of 5.7m tons (down a fraction from 6m tons earlier). We expect volume/revenue to clock 10%/14% CAGRs over FY21-24 due to greater demand and higher prices," the brokerage has said.

Good in terms of margins

EBITDA/ton at Rs 965, much better than industry. High costs pushed EBITDA/ton down 4% y/y to Rs965, whereas EBITDA fell 14% y/y to Rs 1.17 billion. In the inflationary context now, the company did well on operation metrics. While fuel availability continues to be a concern, fuel cost coming off all-time highs would help. The solar facility, and newly ordered 10MW WHRS will save costs. We expect EBITDA to record a 13% CAGR over FY21-24.

Business outlook; Valuation

"The company refinanced its debt at attractive rates and reduced net debt to Rs 4.25 billion in Jan'22. While the 0.5m-ton de-bottlenecking was completed, the 2m-ton GU expansion at Tiroda, Maha, and the expansion at Devapur (clinker 2m tons, GU 1m tons) are expected to be complete by FY24 subject to approvals received. We retain our Buy rating, with a lower target of Rs 233."

According to Anand Rathi, the key risks are rising pet-coke/diesel prices, demand slowdown. The stock of Orient Cement was last trading at Rs 172.35.

Disclaimer:

Investing in equities is risky and investors must therefore understand the risk. The author and Greynium Information Technologies Pvt Ltd would not be responsible for any losses caused based on the article. The author and his family do not hold shares of Orient Cement. Investors should exercise caution on account of heightened volatility in the markets currently.