The company is operating at 92% capacity. So, further gains in volumes will depend on expansion
Decline in fuel and freight costs translated into better-than-expected operating performance
The Street rewarded Orient Cement Ltd’s stock for its stellar March quarter earnings. Shares surged nearly 10% intraday on the National Stock Exchange to ₹116 on 30 April.
The company exceeded analysts’ estimates on most counts with net profit registering a twofold jump annually. Volumes rose 9% year-on-year to 1.83 million tonnes. Realizations growth was healthy, thanks to the recent price hikes in its key markets in western and southern regions.
Decline in fuel and freight costs translated into better-than-expected operating performance. Further, its Ebitda per tonne rose to a multi-quarter high of ₹835. Ebitda stands for earnings before interest, taxes, depreciation and amortization.
But investors’ excitement waned. The stock ended at ₹108.05 on Friday. But from its 52-week low of ₹62.15 that it touched in February 2019, the stock has almost doubled.
What explains this?
“While 4QFY19 was a very strong quarter, performance of the past 5 years suggests that such strong quarterly EBITDA has rarely stayed with the company," analysts from Antique Stock Broking Ltd said in a note on 30 April. They added the management has indicated that capacity expansion plans are delayed for now on account of poor cash flows and delayed receipt of environmental clearances.
To be sure, Orient Cement is operating at 92% capacity utilization. So, further improvement in volumes will depend on expansion. No wonder then, some brokerage firms have trimmed the company’s volume growth forecast for FY21.
Softening prices of petroleum coke and diesel aided cost savings, but a bigger trigger remains sustained improvement in realizations. Orient Cement is estimated to have nearly 50% exposure to Maharashtra. This is followed by south India, where it is said to have 40% exposure.
“Higher than estimated realisations suggest sales were higher in south than west, which witnessed better prices during the quarter. Cement prices in Maharashtra rose 2% quarter-on-quarter (q-o-q) during 4QFY19, whereas Andhra Pradesh saw 3% q-o-q increase and Karnataka saw 7% q-o-q higher prices in 4QFY19," said a Kotak Institutional Equities report on 30 April.
The recent increase in cement prices is likely to aid the company’s realizations growth in the June quarter. But predicting cement prices is tricky. So, it is anybody’s guess whether these price hikes will sustain, especially given the limited clarity on the monsoon.
Also, analysts warned that improvement in profitability remains vulnerable to price movement in a single market. In short, further upside in Orient Cement’s stock price depends on how soon and sharply realizations improve.