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Orient Cement - Capacity Expansion, Premiumisation To Drive Growth: Axis Securities

The company’s ongoing capacity expansion plan will enable it to successfully feed rising cement demand moving forward.

<div class="paragraphs"><p>A mason levelling cement. (Source: freepik)</p></div>
A mason levelling cement. (Source: freepik)

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Axis Securities Report

Investment Rationale:

  • Debt reduction and net debt increase:

Orient Cement Ltd. reduced its long-term debt in FY23 by 34% to Rs 98 crore from Rs 148 crore in FY22. However, its net debt increased by 19% in FY23 owing to higher short-term borrowings undertaken to meet working capital requirements during the year.

  • Increased blended realisation and focus on premium products:

The blended realisation for the year stood at Rs 5,100/tonne, an increase of 3% YoY. This was owing to the company’s clear focus on increasing sales of its premium products, which yielded robust growth of 22% YoY. Furthermore, the company leveraged its brand portfolio and product quality to seek better cement prices during the year.

Expansion plans and greenfield unit in Rajasthan:

With the transfer of limestone mines in Rajasthan, Orient Cement is working to set up a three million tonnes per annum greenfield unit in the region but the operational timeline has not yet been announced.

Additionally, the company is also expanding its cement capacity at its existing unit in Chittapur by three mtpa and expects it to get commissioned in FY26. The 10.1 mega watt waste heat recovery system plant at Chittapur is expected to get commissioned in Q1 FY24. It is noteworthy that the company doubled its use of renewable energy to 14% from the FY22 levels.

WHRS plant expected to get commissioned in Q1 FY24:

The 10.1 mega watt WHRS plant located in Chittapur is expected to get commissioned in Q1 FY24 and will contribute 35% of the total energy requirement. Total renewable power consumption in the unit will increase to 53%, which will help the company further reduce its fuel costs moving ahead.

Key Competitive Strengths:

  • One of the lowest cost producers of cement in India;

  • Robust sales and distribution network;

  • Strengthening financial position;

  • Experienced management bandwidth;

  • Strong regional presence.

Outlook and Recommendation:

The current cost pressure will start easing from Q1 FY24 but the full impact of lower fuel cost will be felt only in Q3 FY24 and onwards due to the lag effect.

Moreover, the company’s ongoing capacity expansion plan will enable it to successfully feed rising cement demand moving forward. Backed by the higher infra spend by the government, focus on affordable and low-cost housing, encouraging real estate demand, and pre-election spending, we believe the cement demand is likely to remain resilient going ahead.

Orient Cement’s premium cement portfolio is growing well and an attempt to increase trade sales would help it improve its realisations and thereby margins as well.

Furthermore, deleveraging the balance sheet has also strengthened the company’s overall financial standing.

On the valuation front, the stock is currently trading at six times and 5.5 times FY23E and FY24E enterprise value/Ebitda and EV/tonne of $47 and 52 for FY24E and FY25E which we believe is attractive.

Click on the attachment to read the full report:

Axis Securities Orient Cement Annual Analysis Report.pdf
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