Having reported a net profit of 199 percent at Rs 43.33 crore versus Rs 14.5 crore in the same quarter last year, Orient Cement's MD and CEO Deepak Khetrapal expects the positive momentum to continue with EBITDA improving 10 percent in second half of FY15 to Rs 900 per tonne.
According to him, higher realizations are aided by the margin expansion which is further aided by the increase in volumes. The demand for cement is likely to increase post festive season as workers resume construction thus increasing demand for this commodity, he adds.
The company expects a revenue growth of Rs 1,750 crore by FY15 end. It has a debt of around Rs 600 crore on books. Orient Cement plans to execute its expansion plan by Q1 FY16.
Below is verbatim transcript of the interview:
Q: What were the realisations this quarter and can you give us the breakup between the western and the southern regions?
A: It’s been a strong quarter. The realisations in the quarter July-September were net Rs 3,900 a tonne. This was a significant improvement, over 10 percent improvement over the same quarter last year and that led us to come back to the healthy levels of bid up a tonne that the industry and all of us need at about Rs 800 a tonne. That’s a result of mainly the market prices plus a very steady internal things that we keep doing in terms of market mix, product mix efficiencies.
On to your question regarding what we sold, we have stuck to the normal things, about 60 percent of our sales have happened in western India and about 30 percent in Telangana which is part of South India and just 10 percent of our total sales go into secondary market like Chhattisgarh, Madhya Pradesh and partly Gujarat.
Q: Cement prices were cut across several markets in November by 3-4 percent. This is little unusual as this is the time when people start resume constructions after the monsoons?
A: That’s right. October has been a rather soft month with all the festivals coming into the same month for Dussehra, Diwali and Chhath Puja and that’s what led to October volumes being a little softer and that put some pressure on the cement prices in the market.
We are now expecting the labour to come back to the construction sites and that is what is likely to increase the off-take of cement and so, prices coming down by Rs 3-5 a bag for a few weeks is not something that we should worry too much.
It is one of those temporary hiccups that come in because the labour availability was a little short nothing structurally bad about it.
Q: In that case, what was your capacity utilisation? If you can even break it up geographically and therefore, what do you expect in the second half?
A: In the first half our capacity utilisation has always been ahead of the rest of the industry. So we did operate even in the second quarter which normally is quite soft, we did operate at about 78-79 percent capacity utilisation whereas the first quarter was about 85 percent.
In the second half we do look forward to total capacity utilisation the second half of the well above 85 percent.
Q: What will be the earnings before interest, taxes, depreciation, and amortisation (EBITDA) per tonne in the second half of the year? Do you think you can better this Rs 750 to 780 EBITDA per tonne and what could be the ballpark range?
A: I would be putting another 10 percent improvement on EBITDA per tonne and so, if we have closed at Rs 800 a tonne in this quarter, in the next two quarters we would be targeting about Rs 900 a tonne.
Coal sourcing is good but don’t forget the impact on EBITDA because we will be selling more volumes in the second half. The fixed cost on per tonne bases they look a little lower although in absolute terms they remain the same. So it is also a function of volumes that we expect to do in the second half not just the costs and the prices.
Q: Can you give a little more colour on the coal sourcing, how much domestic and how much will you have to import if you can just total the overall cost for us?
A: In terms of coal we consume about Rs 7, 00,000 tonnes of coal a year. More than 90 percent of our coal is source locally mainly from the coal mines. We are in a coal rich area and so, most of our coal comes from the nearby mines.
Small things that we need to compensate for in terms of quality we need a high grade coal and so we will buy from South Africa or Australia or if for a captive power we are getting the local coal a little too expensive Indonesian coal becomes very useful.
However, as of now we are actually not seeing much of a price pressure on the coal procurement. This seems to be quite steady in fact very quick numbers; my coal sourcing for October was slightly under the pricing in August and September.
Not under Rs 3,000, I don’t think the growth was as low as that but definitely Rs 3,600-3,700 a tonne landed at our plant.
Q: When will your expansion plans come on stream? What’s the current debt on the books of the company?
A: The current expansion plans are coming on streams as per schedule which is the first quarter of next financial year, so sometime about April-May we will start dispatching cement from our new plant in Gulbarga. Right now we have a little over Rs 600 crore of debt on books.
Q: What’s the free cash flow?
A: There is no free cash flow right now because all the cash flow is going to our project. We will rather use whatever cash flows we have to reduce our borrowing. With total investment into the project gone to nearly Rs 1,200 crore the borrowing is at Rs 600 crore. So balance whatever we are generating from cash we are investing back in the project.
Q: What is the revenue target for the end of the year considering you are doing about Rs 400 crore of revenue per quarter you think it could cross about Rs 1600 -1800 crore by the end of the year or are you expecting more?
A: Yes, we will cross Rs 1600 crore and will be perhaps around Rs 1700 -1750 crore.
Q: A lot was expected with the creation of the new state of Telangana. Are they beginning to give any orders at all? The stories we heard from the Telangana lately were more about farmers committing suicides and rather dismal actually even power shortages and water shortages. But has the Telangana government got around to giving you orders?
A: Not yet. We are all waiting for them but a lot of internal work is going on and as you would understand in the governments even when they start putting the processes in, by the time the results come out it does take a few quarters. So it’s been there now for about two quarters. I would give them another two quarter before the industry start seeing the benefits of their policies or their actions.
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