Buy Orient Cement, target price Rs 71: Centrum

Centrum Broking has upgraded Orient Cement to buy from add rating with a target price of Rs 71 based on EV/EBITDA of 5.2 times FY22 earnings.

Orient Cement’s fourth quarter performance was driven by realisation gains that helped better than estimated performance. According to the brokerage, the volumes fell sharply by 14 per cent due to a combination of the strong base quarter demand and impact of the lockdown due to Covis-19 pandemic towards the end. This pushed revenues down by 13 per cent year on year to Rs 6.54 billion. Shift in fuel mix helped control over all cost inflation restricted at ~3 per cent helping EBITDA to settle at Rs 1.2 bn and EBITDA margin at 18.4 per cent according to the brokerage. The PAT at Rs 402 million was helped by lower interest cost (benefited by working capital management).

According to Centrum, focus on newer markets like Madhya Pradesh and aggressive sales in Maharashtra, cost effectively helps the company offset the weakness in its key markets of Andhra Pradesh and Telangana.

Investment Rationale

The brokerage has revised its earnings estimates downwards for FY21 from Rs1.1 to Rs 2.7 following a better than expected fourth quarter performance and partial recovery in the 1QFY21 from the earlier very weak performance expectations. Orient Cement’s performance largely hinges on the demand/pricing in the Andhra Pradesh and Telangana markets. Revival in these markets will help the company to recover its performance better. In the interim, a focus on cost efficiencies and tapping new markets will only help the company boost its performance once normalcy is restored.

Additionally, steady demand in Maharashtra will add comfort. Factoring the factors, the brokerage keeps its FY22e earnings unchanged at Rs6.4mn tonnes. Recovery in key markets, limited pricing revival and higher cost stays as key risk to the brokerage’s earnings estimates. Orient Cement currently trades at a replacement cost of Rs 2.2 billion/mt sharply lower due to the reaction to the current weakness followed by the Covid-19 pandemic, which according to the brokerage is overdone. It has assigned replacement cost of Rs 3 billion/mt March 2022E capacities to arrive at a fair value of Rs71/sh (earlier Rs72/sh). The discount is still higher (replacement cost of Rs7.5bn/mt) due to risk of regional concentration. New capacity addition is on hold helping the cement company to shape its balance sheet better.

Financials

For the quarter ended March 31, 2020, the company reported standalone sales of Rs 654.52 crore, up 15.95 per cent from last quarter sales of Rs 564.49 crore and down -12.82 per cent from last year's same quarter sales of Rs 750.81 crore. The company has reported net profit after tax of Rs 44.07 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 37.37 per cent stake in the company as of March 31, 2020, while FIIs held 7.49 per cent, DIIs 28.15 per cent and public and others 27 per cent.