Orient Cement: Long term Defensive Bet

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The new policies on works and allocation of additional Rs70,000 Cr to infrastructure provides the cement industry with an advantage. Out of all the midcaps in the cement sector, Orient cement backed by strong fundamentals, high capacity utilization, and new expansion plans becomes an attractive buy at the current levels.



Orient Cement was incorporated in 1979 by the CK Birla Group and is among the most respected cement makers in India. The company is engaged in production and marketing of PPC (Portland Pozzolana cement) and OPC (Ordinary Portland cement). Its principal operating unit is located at Devapur (Telangana) and its grinding unit is located at Jalgaon (Maharashtra). Currently, the company runs with a capacity of 5MTPA supported by a captive power plant of 50 MW.

Expansion plans to raise volumes

After five years, Orient cement has brought its expansion plants on track. Once operational in early FY16, the Greenfield cement plant in Chittapur, Gulbarga district in Karnataka would add 3MTPA to the capacity, taking cumulative cement making capacity to 8MTPA. The new 45MW captive power plant along with a 7MW heat recovery system would support the fuel requirements of the plant in Gulbarga. The presence of an arterial highway linking Bangalore with most centers in Karnataka, Tamil Nadu, Kerala, and Andhra Pradesh close to the plant, supportive captive railway slidings, ready availability of fly ash from captive power plant, and perennial water supply from Kagina River are some of the major advantages of this plant. The project cost of Rs. 1,718 Cr is proposed to be part financed through rupee term loans of Rs. 1,200 Cr and the rest would be financed by cash reserves. The commissioning of plant in Karnataka would strengthen the market access of Orient in its core markets and increase its market share. On the back of steady government policies and infrastructure developments, we expect the tremendous growth in demand. This would ensure a robust volume growth with a consensus estimate of 14% CAGR. With improving demand, we expect the prices to move higher, increasing the levels of realization per tonne. Over the years, despite the economic downturn, orient has managed to increase its capacity utilization to 85%.

Unique positioning to benefit sales and capture a larger market share

Orient cement has its manufacturing facilities located in Devapur (integrated clinker and grinding plant) and Jalgaon (split cement grinding unit) catering to two key markets – Andhra Pradesh and Maharashtra. Despite having a capacity of 3 MTPA (60%) in Telangana and 2 MTPA (40%) in Maharashtra, the sales in Maharashtra contribute to about 65% of its output since its Devapur plant in Adilabad district enjoys proximity to eastern Maharashtra. The Company expect infrastructure development, stable government at the centre, the resolution of the Telangana-Seemandhra dispute, and strong development initiatives in both the states to boost the demand in Maharashtra and Telangana. The Currently, the Devapur

plant in Telangana caters to markets in Andhra Pradesh, Maharashtra, Tamil Nadu, and Karnataka while the plant in Jalgaon caters to Maharashtra, Gujarat, MP, and Chattisgarh. The plant in Gulbarga is expected to cater to a wider market in Karnataka and Tamil Nadu.

Cost efficiency a major growth driver

Orient has historically been the lowest cost producer of cement. Despite higher volumes and increased diesel costs Orient has not seen much of freight costs. The well-placed Devapur plant with its coal resources from Singareni at a distance of 40 Km, fly ash from NTPC Ramagundam at a distance of 40 KM, and thermal power plant at distance of 20Kms constantly optimize the market mix for both the plants reducing their freight expenses. In FY14, Orient has initiated consumption of Pet coke in one of the four lines. The consumption of pet coke has enhanced the use of alternative fuels in the power plant boiler and reduced its coal intake and costs. Petroleum coke presents a viable alternative because of its lower cost since it is a by-product of the refining process. It has a high heat value and low ash content, which favor its use in cement kilns. As a result of the measures undertaken by Orient, the company has placed itself in a cost efficient mode compared with peers in south with attractive margins.

Low procurement cost compared with peers

Orient has meticulously placed its Devapur plant in close vicinity of the limestone reserves, crushing plant, and the grinding units. Hence, the procurement of limestone is done through the conveyor belt present between the reserve and their grinding unit, reducing freight cost.

Softer coal and crude oil prices to reduce expenditure further

Crude oil prices have plunged 60% from the 2014 peaks that they hit in June. Currently, crude oil is trading 40-50$ per barrel. With expectations of crude prices to sustain in the near term, freight cost of cement makers is expected to moderate further. Fuel and freight costs of Orient account for around 42% of the expenditure incurred. The moderation of their prices should further improve the company’s margin.

Financials

Orient cement reported nearly 36% rise in the third quarter net profit at Rs.31 Cr compared with Rs.23 Cr for Q3FY14 due to higher cement sales. Revenue rose to Rs 384 Cr during the quarter from Rs 341 Cr in the year-ago period. However, the prices realized in the third quarter were less than the prices realized in the previous quarter. Consequently, profits saw a marginal decrease. The company expects the demand to pick-up in the coming quarter on the back of increased spending in rural and semi-urban housing and improvement in orders from infrastructure projects.

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