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.
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.