Chola Securities

Orient Cement (Buy)

CMP: ₹165.75

Target: ₹226

Orient Cement is targeting a 87.5 per cent increase in capacity to 15 mtpa by 2020, through organic and inorganic routes. The company plans to acquire a 74 per cent stake in Bhilaj JP cement (2.2 mtpa) and Nigrie’s cement grinding unit (2 mtpa) at an EV of ₹1,450 crore and ₹500 crore respectively (implying an EV/tn of $100 and $40 respectively). This would enhance the company’s cement manufacturing capacity to 12.2 mtpa (an increase of about 52 per cent from current levels) with an entry into Central and Eastern region markets of India, rendering it more geographically diversified and strengthen its market presences.

The company has one of the lowest cost structure with cost/tn at about ₹ 3,055 versus industry average (IA) at about ₹ 3,700. The cost efficiency aided by its self-sufficiency in power (power consumption is at 72 Kwh/t Vs 81 Kwh/t IA), a lower lead distance (average lead distance 325 Km versus IA lead distance 425 Km) and low production costs.

Outlook & Valuation: We initiate coverage on Orient Cement with a ‘Buy’ rating given its strong low cost structure, coupled with capacity addition & geographic expansion leading to higher margins and aiding revenue growth, going forward. With higher state government spending in key markets, the company is well placed to capitalise on the likely uptick in cement demand led by strong project pipeline such as affordable housing and metro projects of State government of Telangana and Maharastra (about 75 per cent of sales) to drive the volume growth of the company and moderation in debt levels going forward.

Risk: Delay in commissioning of new capacity, slowdown in economy and increase in raw material cost.

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