Orient Cement reported Q3FY18 results below expectation. Realisation declined 6% q-o-q (more than expectation) due to pricing pressure in Maharashtra as well as Andhra/Telangana area. Energy costs continue to remain a headwind, leading to 5-quarter low Ebitda per ton of Rs 286, in spite of a 10% y-o-y volume growth. We have tweaked estimates for lower realisation and higher costs, which is expected to normalise only in FY19. Maintain Hold with revised target price of Rs 161.
10% y-o-y volume growth: Orient cement reported sales volume of 1.369mnt in Q3FY18, +10% y-o-y and +5% q-o-q, implying 68% capacity utilisation. This was in line with expectation given the benefit of favourable base of demonetisation. However, realisations have declined steeply (higher than our expectation) by 6% q-o-q, although remain flattish y-o-y due to price hikes taken in Q1FY18.
Energy costs spike: Energy cost pressure has impacted the entire sector but came in even higher than expectation, increasing 12% y-o-y even without the full impact of import duty hike on pet coke in Q3. Pet coke usage in Devapur has decreased from 22% to 13%, but increased at Chittapur from 56% to 75%.
Freight costs remain high: Despite lower average distance travelled at less than 290 km, freight costs have risen by 9% y-o-y due to increase in FOR mix and higher diesel prices. Ebitda per ton declines 22% y-o-y: Other expenses surprised negatively growing to `892 mn in Q3FY18 vs `744 mn y-o-y due to some non-regular maintenance costs. Hence overall Ebitda per ton declined to `286 (lowest in last 5 quarters) largely due to lower realisations. Channel checks suggest that Maharashtra remains an intensely competitive market. Also, Andhra/Telangana is seeing good demand but volume push by some players is restricting price improvement.
Change in estimates: We have revised numbers to account for lower realisation in FY18, which we believe will normalise in FY19/20 only given current prices. Due to more FOR sales, optically sales estimates have increased, although net realisations have reduced. Cost pressures have led to a 16%/4%/3% and 46%/17%/11% cut in FY18/19/20 Ebitda and EPS.
Key trigger for Orient remains not only JP integration, but also its normalisation. Stock looks cheap at $74 EV/ton but given the uncertainty around the acquisition, risk reward remains capped. Maintain Hold with revised target price of `161, 10x Sep-19 EV/Ebitda (in line with other peers). Risks: JP assets normalise faster (+), Realisations decline further (-).
Company description: Orient Cement is primarily a South and West based player with 70% of sales in two states of Maharashtra and Telangana. However, in 2016, it bought 2 assets from Jaypee Group (JP) in central India to expand into East and Central markets. Orient’s current capacity is 8mnt which will expand by 50% to 12mnt post JPA deal completion. But the management has a target of 15mnt by FY20-21.