Stock Review: Orissa Cement India

 

 

OCL India is focused on the eastern region where demand is strong and realisations are firm. Given this, the stock looks attractive

 

OCL India, formerly known as Orissa Cement, is a diversified company with interests in cement and refractories. The company's cement facilities are located in the East. Like other players operating in this region, OCL India has also benefited from strong demand conditions in the region. According to a recent economic analysis, Orissa and neighbouring Chattisgarh are among the fastest growing states in the country. This has kept the cement demand buoyant.
   OCL India is a part of the Dalmia Cement (Bharat) group, which directly owns a 45.4% stake in the company. And, as per the restructuring plan announced earlier, the stake held by Dalmia Cement (Bharat) in OCL India would be demerged and transferred to Dalmia Bharat Enterprises (DBE).

   We had recommended OCL India in our issue dated January 11, 2010, and since then the stock has gained barely 2.9% as compared to a 7.3% rise in the broader Sensex. Also, this stock currently trades at about 0.96 times its trailing 12-month book value, as compared to a range of 0.39 and 1.75 times during the March 2007-March 2010 period.

GROWTH DRIVERS

The company's installed cement capacity was 5.35 million tonne (mt) at the end of March 2010, a rise of 167% from two years earlier. Its facilities are located in Orissa. The growth in the capacity has come at a time, when industry-wide dispatch growth in eastern region was estimated at a buoyant 13.1% for the year-ended March 2010.

   Cement realisations were also stronger on a per tonne basis in the first quarter in the east, in broad contrast to southern and northern region. This is attributed to strong demand conditions even in the first quarter of the current financial year. The cement division contributed 81.5% to the company's net sales for the year ended March 2010. In addition, in its refractory division, its capacity was 106,000 tonne at the end of FY10, a rise of 32.5% from three years earlier.OCL India had invested 1,149.7 crore during the period March 2007 and March 2010, while its operating cash flows was 991.7 crore. As a result, the company's secured loans amounted to 794.7 crore at the end of the previous year, more than double from three years earlier.

   The company is setting up nearly 54 megawatt (MW) captive power plant and this is expected to be brought-on-stream shortly. Also, the company has initiated the process for setting up a cement plant in West Bengal, but details of this project and timeliness are still sketchy.

FINANCIALS

The company's performance in the first quarter of current financial year was adversely affected by a rising cost structure and the resulting fall in segment profit of its key cement division. No doubt, the company's cement realisations grew nearly 10.3% on a per tonne basis to 4,497.4 in the quarter, but it also grappled with higher operational costs, like
power & fuel, coupled with selling expenses. A s a result, its operating profit margin fell 420 basis points year-on-year to 28.6% in the first quarter of the current financial year, despite net sales that rose 3.3% to 363.8 crore.

VALUATIONS:

OCL India trades at a P/E of 5.1 times on a trailing four-quarter basis. Other players with a presence in the East, such as Barak Valley Cements on a consolidated basis trades at a P/E of 6.5 times on a trailing basis, while it is 5.6 times for the diversified Birla Corporation. Investors can consider OCL India for investment on a long-term basis.