The Hindu Business Line : OCL India: Invest

Shareholders of OCL India can subscribe to the rights offer being made at Rs 120 per share. The price is at a 35 per cent discount to the market price and makes it an attractive proposition for shareholders to keep their equity stake intact. At this, the price-earnings multiple works out to 11 times its 2005-06 per share earnings.

Despite being a relatively small cement player with capacities under two million tonnes, OCL India stands to benefit from the favourable industry dynamics.

The company is making a rights offer to fund the expansion in cement manufacturing capacity from 1.8 million tonnes per annum to 2.2 million tonnes. Of a total project cost of Rs 120.3 crore, Rs 76.4 crore will be financed through this rights offer and the rest by internal accruals. As a part of this project, OCL India plans to add one more vertical roller machine to its existing three lines at Rajgangpur, Orissa. The commercial production of the expanded capacity will commence by March 2008.

Business profile

OCL India manufactures cement, refractories and sponge iron. While it has been in the cement and refractories business for over four decades, its foray into sponge iron was as recent as 2002. It is the largest cement producer in Orissa, catering to the eastern markets. As of March 31, 2006, the cement division contributed about 55 per cent of revenues and 75 per cent of profit before interest and tax (PBIT). The refractories division contributed to 30 per cent of revenues and 32 per cent of PBIT, with sponge iron chipping in with the rest.

The cement industry has been passing through a favourable phase in recent times. As one of the fragmented but entrenched players catering to the eastern markets, OCL India stands to gain from strong activity on the infrastructure front in Orissa, which is likely to keep prices relatively firm over the next year or so. Since capacity creation/addition is also likely to be limited in the eastern markets, the cement prices are likely to rule firm.

Finally, the financials of OCL India also rest on a fairly good footing. The company has consistently reported revenue growth of 20-25 per cent over the past four years, with post-tax earnings also growing in the 20-30 per cent band.

Impact of consolidation

Despite the latest round of consolidation moves by key multinational cement majors such as Holcim, Lafarge or Heidelberg, the cement industry continues to remain highly fragmented. Though the market share of the top five players has risen to 47 per cent in 2006 from 34 per cent over the past decade, there are 20 companies with less than two million tonnes of cement capacity. OCL India, which happens to be one of the players that falls under this category, can become involved in the consolidation moves at a later stage.

Offer details: The rights offer is being made in the ratio of one equity share for every six held. The offer opens on September 25 and closes on October 27, 2007.

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