Orient Cement: Poor show in Q2; stock to remain under pressure

The second quarter of this fiscal was a disappointing one for Orient Cement Ltd. The C.K. Birla Group’s flagship firm registered a net loss of Rs29.4 crore year-on-year (y-o-y) for the September quarter, nearly seven times more than Bloomberg estimates of Rs4.10 crore. A slew of factors like higher depreciation and interest costs, subdued volumes, surging power and fuel and fly ash expenses were responsible for this dismal performance. No wonder net sales at Rs384.27 crore in the September quarter missed Street expectations by a wide margin.

Weak realizations and lower utilization coupled with a spike in operating cost took a toll on Ebitda, which declined 57% y-o-y. Ebitda stands for earnings before interest, tax, depreciation and amortization. Volume growth of 16% y-o-y at 1.17 million tonnes was lower than anticipated and mainly impacted by heavy rainfall and shortage of fly ash during the quarter gone by.

The Orient Cement stock has lost 23.75% in the past seven trading sessions. But that’s not all. Pressure on the stock is likely to remain going ahead due to two recent acquisitions of Jaypee Group assets in east and central India, which are expected to be completed in the first half of 2017.

“Delivery from these plants may happen from late FY18-FY19. Despite improvement in operational performance, the debt addition (D/E moving from 1.2 to ~1.55x) and equity dilution (~17-18% at current prices likely) may continue to weigh on the stock,” said HDFC Securities Ltd’s recent earnings review report.

Though cement prices are expected to improve in the second half of the year in regions that Orient Cement operates in and normalized production levels would improve profitability, the acquisition overhang would remain for some time. Apart from that, the demonetization drive is seen as a short-term dampener.

“Pricing has improved in Maharashtra after monsoon. However, demonetization may lead to demand destruction/deferment, especially from the rural areas, delaying the much awaited recovery after two consecutive drought years,” the brokerage firm cautioned.

Orient Cement shares have underperformed the Sensex in the past one year and are still trading at an expensive valuation of one-year forward price-to-earnings multiple of 47.44, higher than its peers.