OCL India: Scaling up

Investors with a two-year perspective can consider buying the stock of OCL India. The restructuring exercise of cement operations of the Dalmia group is expected to give it the much-needed scale and improve operational efficiency. The recommended swap ratio of two shares of OCL for one share of Dalmia Bharat Limited (DBL) is fair, valuing the latter’s southern and eastern operations much below replacement value.

Moreover, volume growth of its entire group has been stronger and more consistent than that of other players in the last two years. Being operationally efficient has helped the group’s holding company, DBL, clock among the highest operating profit (EBITDA) per tonne in the industry. At ₹696, (28 per cent below its peak levels), the OCL India stock’s valuation is attractive with an enterprise value (EV) of $81 per tonne compared to the replacement value of $150.

DBL has 85 per cent stake in Dalmia Cement Bharat Ltd (DCBL), which in turn has subsidiaries — OCL, Dalmia Cement East (Bokaro), Adhunik and Calcom. Put together, the group has a cement production capacity of 25 million tonnes (mt). While OCL has a cement capacity of 6.7 million tonnes in Odisha and Bihar, Dalmia Cement East (Bokaro) has production capacity of 2.6 mt in Jharkhand. Besides, the group has footprint in the north-east with a capacity of 3.6 mt (via Adhunik and Calcom). Currently, only two entities DBL and OCL are listed in the stock exchanges.

About 52 per cent of the group’s capacity is in the East, with the rest in the South (12.1 mt). The group companies are currently going through a restructuring exercise whereby two shares of OCL would be given for one share of DBL. Post-restructuring, cement operations of the group would be merged into OCL, which will then be renamed DCBL (Dalmia Cement Bharat Limited). Only Calcom will exist as an independent entity with DCBL holding 76 per cent stake in it. The swap ratio is pending approval from the high court as well as shareholders.

Currently, the share price of OCL is quoting at a slight premium (2.1 times) to the proposed 2:1 swap ratio. DBL is currently quoting at an enterprise value (EV) per tonne of $112 (including 75 per cent stake in OCL operations). This is below the benchmark replacement value of $150 per tonne.

OCL in turn quotes at a relatively lower EV per tonne of $81. It effectively values its South (and North-East) operations at an EV per tonne of $123, which is reasonable. OCL has historically been getting a lower valuation multiple despite healthy profitability and cash flows because of its relatively smaller size. With the scaling of its operations, post-restructuring, it would become the fifth largest cement player in the country with sales reach in 22 States.

While the capacity utilisation of the South is lower at sub-50 per cent levels, post-restructuring, OCL shareholders would get an opportunity to benefit from higher expected volumes from the South.

In 2016-17, there was doubling of budgeted capex for the irrigation sector by Andhra Pradesh and Telangana, which has already led to improvement in volumes in the region. These States usually spend 80 per cent of the budgeted amount. Irrigation is a key driver of cement consumption in the South.

Net sales of OCL India were up 19 per cent during the year 2015-16 to ₹2,701 crore. Its net profit doubled to ₹234 crore in 2015-16. During the first half of 2016-17, sales were up 8 per cent Y-o-Y to ₹1,497 crore while net profit was up 118 per cent to ₹192 crore.