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Sell Orient Cement; target of Rs 237: ICICI Securities

ICICI Securities is bearish on Orient Cement has recommended sell rating on the stock with a target price of Rs 237 in its research report dated August 07, 2024.

August 08, 2024 / 12:31 IST
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sell
sell

ICICI Securitie's research report on Orient Cement

ORCNMT chose to protect margins over chasing volumes at unremunerative prices (despite weak demand in Q1FY25 impacted by heatwave and general elections). EBITDA/t rose >13% YoY (down 17% QoQ) to INR 708 as volume plunged 15% YoY (down 21% QoQ) and realisation stood flat QoQ (down 1% YoY). On cost front, while variable cost/t eased 1% QoQ (down 7% YoY), negative operating leverage (impact of weak volumes on fixed cost/t) led to overall cost/t rising 3.3% QoQ (down just 3% YoY). EBITDA at INR 960mn slipped 3% YoY (down a huge 35% QoQ), being 17% below estimates. Factoring in management guidance of weak volume and pricing persisting in Q2FY25 as well, we chop FY25E EBITDA by 14%. While our optimism leads us to retain FY26E EBITDA, there looms a risk should prices remain stressed.

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Outlook

Leading by example (for cement industry), Orient Cement (ORCMNT) prioritised value over volume in Q1FY25. While volume plunged 15% YoY, realisation stood flat QoQ. Ergo (despite only marginal respite from costs), EBITDA drop was contained to 3% fall YoY. That said, the underlying weakness in demand and prices in key markets of ORCMNT are forcing 14% cut to our FY25E EBITDA. Being optimistic, while we retain FY26E forecast, there certainly looms a risk should prices remain weak. Though industry commentary has stayed subdued for the past several months, recent surge in stock price is attributable to M&A buzz (Link 1; Link 2) which is highly speculative and beyond the scope of our fundamental analysis. With current EV/t being broadly at par with replacement cost, we downgrade ORCMNT to SELL with revised TP of INR 237 (Hold, INR 220 earlier), valuing it at an unchanged 8x FY26E EV/EBITDA.