Orient Cement - Q1FY16 Result Update - Weak pricing but cost efficiency continues: Centrum

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Rating: Buy; Target Price: Rs220; CMP: Rs183; Upside: 20%



Weak pricing but cost efficiency continues



We maintain BUY on Orient Cement (ORCMNT) with a revised TP of Rs220.
Its Q1FY16 EBITDA/ PAT missed estimates and declined 10%/ 20% YoY on
account of sharp pricing erosion in Maharashtra market. However,
stable pricing in south and cost efficiency moderated the earnings
decline. The commercial production from its Karnataka plant is
expected in Q3FY16. This along-with demand improvement from 2HFY16
should drive ORCMNT’s 20% volume CAGR in FY15-18E. Ensuing lower crude
& coal prices and strong cost efficiency should further boost margin
expansion.

$ Poor pricing in Maharashtra dragged down profits: Weak cement demand
in west and south markets led to 10% YoY volume decline. While pricing
in southern market remained stable QoQ (on ensuing supply discipline),
aggressive cement price cuts in Maharashtra (~60-65% of its current
sales market) drove down NSR 10% QoQ (much lower than our est of 2%
QoQ decline).  This arrested NSR growth at 1.3% YoY and hence revenue/
EBITDA/PAT declined 9%/ 10%/20% YoY as NSR growth offset the modest
opex per MT increase by 1.6% YoY.

$ Cost efficiencies continue: Its input costs per MT (total of raw
materials, stock adj and power & fuel) declined 5% QoQ (+1% YoY). The
company reasoned better plant efficiencies and declining coal/diesel
costs for this improvement. Even employee costs and other expenses
combined declined 2% QoQ (up 8% YoY) on per MT despite 2% QoQ and 10%
YoY volume decline indicating positive operating leverage from tight
cost control. Freight cost per MT rose 13% QoQ tracking increase in
lead distance but declined 2% YoY on lower diesel costs.

$ Capacity expansion & captive power addition to drive profitability:
ORCMNT’s 3mn MT cement expansion and 50MW CPP in Karnataka are now
expected to be commissioned by end of Q2FY16. This expansion should
drive ORCMNT’s 20% volume CAGR during FY15-18E. Railway siding is
expected by end of FY16.  We lower our EBITDA estimates for
FY16/17/18E by 28%/ 19%/ 9% respectively as we cut volume estimates
for these years by 9%/ 4%/ 0% respectively and NSR estimates by 5%
each to factor in plant commission delay and weak pricing in1HFY16.
However, we remain confident of ORCMNT’s continued cost efficiency
thereby aiding operating margins.

$ Valuation & Risks: We estimate ORCMNT to deliver 37% EBITDA CAGR
during FY15-18E which should drive its RoCE expansion by 915bps during
FY15-18E.  We re-iterate BUY with a lower TP of Rs220 based on 8.5x
Sep’17E EBITDA (earlier Rs240 based on 8.5x Mar’17E EBITDA). Key
risks: continued weak demand beyond H1FY16 can disrupt supply
discipline in south and also mute volume growth, and sharp recovery in
coal & crude prices can lead to surge in cost pressure.



Thanks & Regards