Recommendation from Cement Sector

Recommendation from Cement Sector

This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon. 

ORIENT CEMENT : CEMENTING A PROFITABLE BOND

HERE IS WHY
β˜›   Good financial improvement
β˜›   Good growth prospects
β˜›   Focus on cost reduction

Orient Cement Limited is engaged in the manufacturing and sale of cement. The company’s products include Birla A1 Premium Cement, Birla A1 Premium Cement-OPC 53 Grade and Birla A1 Premium Cement-OPC 43 Grade. Its product mix includes ordinary Portland cement (OPC) and Pozzolana Portland cement (PPC). The company is part of the CK Birla Group and its manufacturing facilities are located at Devapur in Telangana, Jalgaon in Maharashtra and Chittapur in Karnataka. The cement production capacity of the Devapur plant is approximately 3 metric tons per annum (MTPA). The company operates a clinker grinding plant in Jalgaon, Maharashtra of approximately 2 MTPA cement production capacity.

Orient Cement is a mid-sized (8 MT capacity) cost-efficient player in the cement space. Its self-sufficiency in power (95 MW), ability to switch between fuels (pet coke, coal), lower lead distance and proximity to key raw materials like limestone, coal as well as end-market have helped it to maintain its cost leadership in the industry. The company has reduced its working capital requirement, thus bolstering free cash on its books, which it used to reduce its debt by 20 per cent from the March 2020 level. With improved cash flows the management is exploring the option of either using it for prepayment of additional debt or going for capital expenditure focused on WHRP (Jalgaon) and digital initiatives. 

For the quarter ended September 2020, standalone revenue from operation registered a fall of 7.28 per cent to Rs 477.50 crore from Rs 514.99 crore in the corresponding period the previous year. The southern region stayed weak due to the impact of the pandemic and heavy monsoon. The management feels demand is expected to bounce back in Andhra Pradesh and Telangana in the coming quarters, which will help the company to boost sales volumes and improve performance going ahead. The company’s EBITDA (excluding other income) saw a growth of 111.12 per cent to Rs 113.23 crore in Q2FY21 from Rs 53.64 crore in Q2FY20.

Despite the pandemic-led disruption, the company managed to increase EBITDA per ton to Rs 1,109 per ton in Q2FY21 (up from 432 per ton in Q2FY20) led by higher realisation and cost efficiencies. EBITDA margin saw an expansion of 127.69 per cent to 23.71 per cent owing to decreased cost of materials consumed and other expenses. It reported quarterly net profit at Rs 34.82 crore in September 2020 against net loss of Rs 7.70 crore in September 2019. With resumption of economic activities and return of migrant labour to construction sites, it is expected that the cement demand will strengthen in the coming quarters.

The earnings’ prospects of the company look positive given its focus on cost rationalisation and reduction of debt. Orient Cement is expected to report better numbers in the coming quarters on account of sales volume growth from Andhra Pradesh and Telangana, demand recovery in infrastructure and real estate sectors, increasing penetration of premium cement sales and cost-saving initiatives. The company had a healthy return on capital employed (RoCE) of around 11.08 per cent and PE of 17.50x which is comparatively lesser than its peer Ultratech Cement which stands at a PE of 26.67x and Ambuja Cement which stands at 28.08x. By virtue of these factors, we recommend our readerinvestors to BUY this stock.

 

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