The delay in improvement in the pricing situation is hitting Orient Cement especially hard, given its high leverage. (Priyanka Parashar/Mint)
The delay in improvement in the pricing situation is hitting Orient Cement especially hard, given its high leverage. (Priyanka Parashar/Mint)

The real reasons behind Orient Cement’s swift fall from glory

  • Orient Cement share prices have more than halved in the last year, and are currently trading at 66.10 apiece on NSE
  • The stock is trading at a one-year forward enterprise value/ebitda of 7.81 times, making valuations unattractive

For Orient Cement Ltd, reviving its bond with investors could be a tough row to hoe. Its shares have more than halved in the last one year, and are currently trading at 66.10 apiece on the National Stock Exchange (NSE). If one takes into account its life-time high of 232 in 2016, the stock has nosedived.

For Orient Cement, the big worry for investors has been its high leverage. The company’s recently announced brownfield expansion plans in Karnataka and Telangana are discomforting as well, and given its subdued earnings performance, deleveraging could be challenging. Net debt in FY18 stood at 1,200 crore.

Orient Cement's profitability was among the worst in the sector, with ebitda/tonne falling to  <span class='webrupee'>₹</span>251 in Q3 FY19.
Orient Cement's profitability was among the worst in the sector, with ebitda/tonne falling to 251 in Q3 FY19. (Vipul Sharma/Mint)

“Considering the company’s leverage, these expansions are aggressive. Earnings are not improving and whatever money comes in is used for debt servicing. The market does not like such a combination," said an analyst with a domestic broking firm.

Earnings are under pressure because of poor realizations. In the December quarter, or Q3, net loss narrowed from 17.67 crore in the year-ago period to 13.70 crore. Volume growth of 10% on a year-on-year basis to 1.51 million tonnes was healthy. But dismal realization growth due to suppressed cement prices in key markets came as a dampener. The delay in improvement in the pricing situation is hitting the company especially hard, given its high leverage.

“Orient reported Ebitda/ton of 251, which is among the lowest of all (cement) companies. A moderate increase in cement prices can aid a large jump in earnings given low Ebitda/ton at present," Kotak Institutional Equities said in a report Monday.

Ebitda stands for earnings before interest, tax, depreciation and amortization.

Orient Cement’s shares traded as high as 165 apiece in February last year, as investors celebrated the decision to pull out of the 2,000 crore deal to acquire assets from Jaiprakash Associates Ltd. But the joy was short-lived, and things have only gone downhill since then.

The stock is trading at a one-year forward enterprise value/ebitda of 7.81 times, making valuations unattractive, keeping in mind the company’s earnings performance.

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