‘Add’ on Orient Cement with TP of R230

By: |
Published: October 8, 2016 6:09:50 AM

In a bid to expand its geographical presence as well as gain scale, Orient Cement has announced its intent to acquire 4.2 mtpa of cement capacities, including a clinker capacity of 1.1 mtpa from Jaiprakash Associates for an enterprise value of R19.5 billion.

In a bid to expand its geographical presence as well as gain scale, Orient Cement has announced its intent to acquire 4.2 mtpa of cement capacities, including a clinker capacity of 1.1 mtpa from Jaiprakash Associates for an enterprise value of R19.5 billion. The transaction comprises (1) acquiring the 74% ownership of Jaiprakash Associates in Bhilai Jaypee Cement Corporation housing a grinding unit of 2.2 mtpa and a 1.1 mtpa clinker unit at Bhilai/Babupur, Madhya Pradesh for a consideration of R14.5 billion ($ 99/tonne), and (2) acquiring a 2 mtpa grinding unit in Nigrie, Madhya Pradesh under Jaiprakash Power Ventures for an enterprise value of R5 billion ($ 38/tonne). Orient will likely fund its share of investment through a mix of debt, internal accruals and fresh equity raise.

Orient Cement has done well to expand its capacities to 8 mtpa (from 5 mtpa) in FY2016 with contained production costs. The funding of another R17.3 billion (adjusted for SAIL) of assets would require capital infusion that would be a combination of debt and equity over and above extant net debt of R12.5 billion; we take comfort from the improved pricing trajectory in Maharashtra and Andhra Pradesh. We lower rating to add (from buy) with a revised target price of R230/share (from R175/share) based on 8X EV/EBITDA on September 2018E earnings (from 7X on March 2018E) taking into consideration a lowered cost of capital.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.