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OCL india:most underperformed cement stock

Discuss OCL india:most underperformed cement stock within the Stock Markets Tips & Gyan !! forums, part of the Quiz , Marketplace and Community games category; MOST UNDERPRICED SCRIP IN CEMENT INDUSTRY OCL India Ltd. (502165) (Rs. 170/- for Rs. 2/- Face Value): OCL India Ltd., ...

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OCL india:most underperformed cement stock - April 21st, 2006

MOST UNDERPRICED SCRIP IN CEMENT INDUSTRY
OCL India Ltd.
(502165) (Rs. 170/- for Rs. 2/- Face Value):
OCL India Ltd., the manufacturer of 'Konark' brand has an installed cement capacity of 1.45mn tonnes and clinker capacity of 1.1mn tonnes as on March 2005. It has a strong presence in Orissa with 74% of the sales within the state and the balance being distributed between Jharkhand/Bihar (16%) and West Bengal (10%). In order to supplement its cement industry the company has further diversified its business model by foraying into sponge iron manufacturing and refractories where it has an installed capacity of 120,000 tonnes and 80,000 tonnes respectively.

OCL also has Sponge Iron Plant with capacity of 90,000 tonnes.

OCLs Refractory Division has a capacity of 80,000 tonnes per annum. The break up of which is as follows:

Product Capacity
Silica bricks 25000
Basic burnt bricks 24000
Magnesia carbon Bricks 20000
Fire clay and High Alumina bricks 6000
Continuous casting refractories 800
Castable and precast blocks 200
Basic, Silica high alumina ramming masses/mortars 4000
Total 80000

OCL has the widest range of refractories with leadership in some of them i.e. silica, concast etc. Further, more than 70% of the total refractories consumption is closely linked to the fortunesa of the steel sector, which is witnessing a strong upturn in terms of fresh capacity addition and modernization. The company has further de-risked its refractories business model by foraying into manufacturing of refractories for aluminium, copper and glass industry.

The refractories division of OCL has a strong customer base in the export market with major customers being BHP steel, ISCOR, CSN, British steel POSCO, US Steel and many more.

Financial Performance:

FY05 9MFY06 FY06E FY07E
Gross Sales 570.00 462.00 642.00 710.00
Depreciation 22.38 19.53 26.50 28.50
Net Profit 28.16 26.22 39.00 58.00
CASH PROFIT 50.54 45.75 65.50 86.50
Equity 5.94 5.94 7.60 7.60
EPS (on Rs. 2 Face Value) 10.26 15.26
Cash EPS (on Rs. 2 Face Value) 16.80 22.80

For FY05, company achieved sales of Rs. 570 crs. and NP of 28.16 crs. Cash Profit was 50.54 crs. EPS and Cash EPS was 47.4 and 98.9 respectively on Rs. 10/- Face Value. In current year, company has been performing still better as for 9MFY06, it has reported sales of 462 crs. and NP of 26.22 crs. Cash Profit is 45.75 crs.

Future Prospects:

1) Considering future potential of cement demand and adverse demand supply scenario in Eastern Region, OCL is increasing its cement capacity to 1.80mn tonnes in Phase-I incurring capex of Rs. 120 crs. Impact of this expansion will be felt in Q1FY07. In Second Phase, cement capacity will be increased to 2.3mn tonnes at capex of 175 crs. to be operational by April 2007. Going forward, OCL will increase its cement capacity to 3.5 - 4.0mn tonnes since it has adequate limestone reserves.

2) 5 major companies have entered into MOU with Orissa Government for setting up steel projects in the state which will increase demand for its refractory division.

3) Although margins in sponge iron business have come down, company is increasing sponge iron capacity to 1.20 lakh tonnes as long term prospects appear good.

4) To utilize the waste heat generated from sponge iron, 14MW Power Plant is being set up at a cost of Rs. 50 crs. which will satisfy 40% of its total power requirement. Per unit cost of power is expected to come down to Rs. 1.40 per unit as compared to current cost of 3.10 per unit. It will help OCL save more than Rs. 10 crs. p.a.

Transportation cost of OCL is lower by Rs. 7-8 per bag compared to its competitors due to strategic location of its plant and cement movement by rail.

Valuations:

1) Due to surge in cement prices, share price of most cement companies have gone up by 50% - 100% in last 3-4 months. However, CMP of OCL is still 13% lower than its 52 week high of Rs. 197/- which was achieved 6 months ago.

2) To finance its expansion programme, company has announced Rights Issue which will be attractively priced.

3) Normally, cement companies have large equity base. However, OCL Equity is tiny, looking at its big capacity which means that, even small rise in cement prices will give big jump to its EPS.

4) OCL is likely to surpass our projections of FY07 and may report much higher NP.

5) Stock is trading at 16 times of FY06E EPS.

6) Its trading at just 11 times of FY07E EPS although well managed companies like Shree Cement, G.A. Cement, ACC, Chettinad etc. are trading at 22-45 of their earnings.

Looking at small equity, big capacity, proposed expansion, OCL deserves valuations at par with the best in the industry. Stock deserves to quote at minimum 20 P.E. Ratio. Thus, based upon FY07E EPS (although actual EPS is likely to be much higher), OCL should be Rs. 300/- in less than 12 months. Buying strongly recommended.
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