Sell OCL India; target of Rs 724: SPA Financial

OCL India reported excellent set of numbers on the back of improvement in the performance of core cement segment. While revenue growth of the segment improved by 12.7%, EBIT improved by 72.8%. Cement volumes during the last quarter grew by 7.2% YoY. Refractory segment's business continued to deteriorate as it reported an EBIT loss (for the seventh consecutive quarter) of INR 45 mn in Q2FY17 vis-à-vis EBIT loss of INR 54 mn in Q2FY16, even through its revenue improved by 65.1% YoY. The scheme of arrangement between OCL India, Dalmia Cement East Ltd and various other subsidiaries of Dalmia Cement Bharat is pending for approvals with respective High Courts. We change our rating from HOLD to SELL with a target of INR 724 due to sharp appreciation in the stock price witnessed over the last quarter.

Cement demand after languishing in low single digits for last 3 years, is expected to recoup back to +1.5x GDP over the next few years, as infrastructure projects and initiatives announced by the Government comes on stream. OCL being one of the leading players in Eastern region will benefit immensely from increased focus on infrastructural development in East India. Cost reduction measures through commencement of captive power unit and strong prices in the eastern region promises strong outlook for the company. Return ratios too are expected to improve with cessation of capex plans. Currently the stock is trading at FY18E EV/EBIDTA of 7.8x & PE of 14.3x and EV/tonne of INR 6446 its FY18E capacity. We change our rating from HOLD to SELL with a target of INR 724 based on FY18E EV/tonne of INR 4875, due to sharp appreciation in the stock price witnessed over the last quarter.