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    Cost control gives Orient Cement the edge during slowdown

    Synopsis

    The operating profit margin of Orient Cement has grown at an average of 16.2% against 11.8% of small-and-mid-sized companies during the same period.

    ET Bureau
    Andhra Pradesh-based Orient Cement has emerged as a decent performer and one of the most cost-efficient companies among small-and-mid-sized cement players, which are reeling due to the general slowdown.

    The operating profit margin of Orient Cement, which got listed in July last year after it was demerged from Orient Paper, has grown at an average of 16.2% against 11.8% of small-and-mid-sized companies during the same period. The company’s MD and CEO Deepak Khetrapal attributes this to the company’s ability to manage costs. “Our efforts at managing costs have been the main reason behind our efficiency. This has distinguished us from our peers.”

    This is reflected in the company’s cost of cement production. In the past year, the weighted average cost of cement production for the last four quarters had been Rs 2,900 per tonne. Barring Shree Cement and JK Lakshmi Cement, which also produce cement at almost the same cost, Orient’s bigger competitors such as Mangalam Cement, India Cements, Ramco Cements and JK Cement had run up an average cost of over Rs 3,300 per tonne.

    One of the main reasons for this cost advantage is the savings on freight costs as the cement plant (in Devapur in Andhra Pradesh) is located close to Singareni Collieries Company, a government-owned coal mining firm. Due to its proximity to the coal mines, Orient Cement consumes 720 kilo calories to produce a tonne of cement, while its peers require 750 kilo calories. At present, Orient Cement has a capacity of 5 MT through its cement plants in Devapur and Jalgaon in Maharashtra.

    The company plans to expand its capacity by 3 MT through its greenfield cement project at Gulbarga in Karnataka by FY16. It derives 60% of its sales from Maharashtra (western region) and close to 40% from the southern region. The demand for cement in the West has kept pace with supply.

    Maharashtra, with its capacity of close to 32 MT, consumes close to 13% of India’s cement consumption of 250 MT. And once construction picks on investments in infrastructure and real estate projects, the company will be one of the few players to benefit in Maharashtra. In the South, even though there’s overcapacity and weak demand, the company is operating at a capacity utilisation of 85%, while others are operating at 60-65% levels.

    “Our market focus has been on rural and semi-urban areas. When most players are struggling to increase their revenues from Portland pozzolana cement (PPC) due to high margins involved in it, we derive 75% of our revenues from it, while the rest 25% comes from ordinary port cement (OPC). This has worked to our advantage,” said Khetrapal.

    In the past year, the stock of Orient Cement has fallen by 20%; its peers such as JK Lakshmi Cement, JK Cement, Mangalam Cement and India Cements have lost 23% on an average in the same period.

    On valuation, on a one-year forward basis, the company is trading at an EV/tonne of $40, far lower than the average of $59 of small-and-mid-sized cement companies. At present, the company is virtually debt-free. Post expansion, by FY15, its debt-to-equity will be 1.2, which is manageable, given its presence in strategic markets.

    “When the demand in cement industry is weak, it is better to stick to costefficient cement companies. More so, if these companies expand in low cycle, they tend to do better when the cycle changes. In the small-size category, Orient Cement is a better play,” said Ravi Sodah, cement analyst with Elara Capital.

    On a one-year forward basis, the company is expected to clock return of capital employed (RoCE) of 12.3%, which will be higher than India Cements, JK Cement and Mangalam Cement, which are expected to trade at an average RoCE of close to 6%.



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