As consolidation efforts in the cement industry intensified following a slew of acquisitions by large sectoral players in the recent past, investors are betting on smallcap stocks which are likely to be targeted. One such stock is Orient Cement Ltd (OCL), promoted by CK Birla Group, which has witnessed strong buying in the past month, delivering more than 63% returns to its shareholders. The rally in the smallcap cement stock can be attributed to speculation in the market that UltraTech Cement is reportedly in talks with promoter CK Birla to buy a stake in the company. If this deal happens, this would further solidify UltraTech’s presence in southern India.
In less than a month, cement heavyweights UltraTech Cement and Adani Cement picked up stakes in regional cement companies such as India Cements and Penna Cement, respectively, to expand their market share through organic and inorganic expansions. Both these regional players are from southern India, which is strategically important from the perspective of raw materials.
Orient Cement is a mid-size cement manufacturer present in southern and western regions. It has an 8.5 million tonnes per annum (MTPA) cement capacity along with 5.5 MTPA clinker capacity with a presence in Maharashtra, Karnataka, Telangana, Andhra Pradesh, Madhya Pradesh and south Gujarat. This complements well with UltraTech’s Southern capacities as it has 2 MTPA in Telangana, 5 MTPA in Tamil Nadu, and 10.6 MTPA in AP.
How Orient Cement has fared so far
Orient Cement made its debut on stock exchanges in 2013 after Orient Paper demerged its cement business as a separate entity. The smallcap cement stock has risen 450% in the last 11 years, while it touched its lifetime high of ₹329.40 early this month on July 1, 2024. The counter hit its 52-week low of ₹130.35 on July 5, 2023.
Early today, Orient Cement shares opened higher for the second straight session at ₹323.85 after ending 2.83% higher at ₹307.05 on the BSE. During the session, the stock gained as much as 5.5% to ₹323.85, while the market capitalisation rose to ₹6,350 crore.
In the last year, Orient Cement has risen 141%, while the uptrend consolidated in the last six months, with the stock price growing by nearly 13% during this period.
For the financial year ending March 31, 2024, Orient Cement posted 42.37% growth in its net profit at ₹174.85 crore as compared to ₹122.81 crore a year before. The total income in FY24 was up 8.5% to ₹3,200.60 crore compared to the previous fiscal. The board of the company also declared a final dividend of ₹1.50 per equity share worth ₹1 each, at 150%, for the financial year 2023-24.
Consolidation in cement sector
According to a recent report by ICRA, large cement companies are looking to increase their capacity and maintain market share through organic and inorganic expansions, considering healthy demand prospects for the sector. The agency estimates that the market share of the top five cement companies (UltraTech Cement Limited, Adani Group, Shree Cement Limited, Dalmia Cement (Bharat) Limited and Nuvoco Vistas Corporation Limited) witnessed a steep rise to 54% as of December 2023 from 45% as of March 2015, and expects it to further increase to 55% by March 2025, resulting in consolidation in the cement industry.
ICRA expects the credit profile of cement producers to remain stable, driven by healthy growth in operating income, improvement in operating margins and comfortable leverage metrics. “Although the debt dependence is likely to remain high to fund the ongoing capex plans, the leverage metrics of the cement companies, as measured by Total Debt/OPBIDTA, are estimated to remain comfortable at 1.3-1.4x in FY2025 compared to 1.4-1.5x in FY24,” it said in a report released on June 13, 2024.
As per the report, the consolidation, taking place across India, is primarily led by the eastern and the western regions. The share of the top five cement companies in the eastern and the western regions is estimated to increase to 76–79% in FY25 from 54% in FY15.
The southern region is highly fragmented with only 40% share held by the top five cement players in FY15. This may go up to 50% by FY25. The northern and central regions were highly consolidated in the past (65-75% in FY15) and are expected to remain in the range of 75-85% by FY25, ICRA said in its report.
Till March 31, 2024, 947 corporate insolvency cases across the sectors were resolved under the Insolvency and Bankruptcy Code (IBC) with an average haircut of 68%. However, the average haircut through the IBC route for the cement sector stands at 21%, which is much lower than the overall average. The primary reasons working in favour of brownfield acquisitions have been access to good quality limestone reserves and the higher cost of setting up greenfield cement plants compared to the acquisition of existing operational ones, the report notes.
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