Orient Cement: Acquisition a near-term drag on earnings, stock price
The strategic acquisition of two Jaypee group assets is weighing on the Orient Cement stock and is expected to impact the latter’s earnings in the near future
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Among regional players, South-based cement companies have done well in the recent past, buoyed by relatively strong demand in the region. While shares of most cement makers based in south India posted decent returns in the past one year, the Orient Cement Ltd stock has fallen more than 8%.
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After three straight quarters of losses, Orient Cement clocked a profit in the fourth quarter. A Bloomberg poll had estimated a loss of Rs90 lakh. However, on a year-on-year (y-o-y) basis, net profit declined by 11% to Rs16.52 crore, hit by interest costs and depreciation booked during the year on the Chittapur plant.
What also came as a surprise was its 25% y-o-y cement volume growth to 1.73 million tonnes, although this surge was aided by faster ramp-up of its new 3 million tonne plant at Gulbarga, which caters to its key markets.
“Realisation/tonne was up 9.6% y-o-y to Rs3,443 following the strong rise in cement prices in the Western region, which accounts for 47% of sales,” an Anand Rathi Research report said. According to recent dealer channel checks by brokerages, cement prices in western India have seen a sharp recovery in June. Given the significant exposure to the region, Orient Cement stands to be a beneficiary of it.
On the flip side, rising petroleum coke prices and elevated freight costs are likely to impact its profitability. But that concern is not unique to Orient Cement Ltd, it is a worry for all cement makers. Then why has only this stock taken a beating? It is the strategic acquisition of two Jaypee group assets that is weighing on the stock and is expected to impact earnings in the near future.
Orient Cement will acquire the Bhilai Jaypee Cement and the Nigrie Cement grinding unit for an all-cash consideration of Rs1,946 crore. It expects the deal to be completed before 31 March 2018, it said in a recent statement.
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The acquisition will boost the company’s capacity from 8 million tonnes to 12.2 million tonnes and give it exposure to the markets of central and east India. However, heightened debt after the deal would hit the company’s profitability in the next 2-3 years, analysts cautioned. Also, analysts said that company plans to pursue bridge debt financing and delays in implementing the deal due to procedural issues could be adding to nervousness. “Despite the strong numbers, the key monitorable for investors is the JPA (Jaypee group) asset acquisition progress and details on operational profitability. The EBITDA from acquired operations may not be additive given it needs clinker volumes to be diverted from Devapur,” HDFC Securities Ltd said in a report. Ebitda stands for earnings before interest, tax, depreciation and amortization.
That is why, in spite of the recovery seen in the March quarter earnings, the pressure on the stock is likely to continue.