>Orient Paper & Industries (ICICI DIRECT)

Volume growth negating realisation pain…
Orient Paper has reported net sales and net profit of Rs 548 crore and Rs 4.8 crore, respectively, in Q4FY10. The reported net profit was ahead of our estimate of Rs 47.3 crore due to higher than expected margin in the electrical fan segment and higher cement volume. It reported healthy cement volume growth and sequential rise in cement realisation. Going forward, we expect cement realisations to be under pressure on capacity surplus in the southern region, where the company operates its cement business, and paper margins to improve. Considering the cement volume growth, paper business revival and cheap valuations, we maintain our target price of Rs 64 on the stock with BUY rating.

■ Topline up 17% YoY (48% QoQ), cement realisation up 10% QoQ Orient Paper reported net sales of Rs 548 crore in Q4FY10, increase of 17.4% YoY and 48.1% QoQ. Cement revenue increased 17.4% YoY (28.8% QoQ) to Rs 274 crore as cement volume rose by 40.3% YoY (17.5% QoQ). Cement realisation declined by 16.4% YoY but increased by 9.7% QoQ. Paper revenue has declined by 13.7% YoY on lower volumes due to water shortage. Sequentially, it has increased by 8.1%. Revenues from the fan segment have increased b y 37.1% YoY (130.9% QoQ) to Rs 195.4 crore.

■ Cement margin down 1230 bps YoY (430 bps up QoQ), paper in loss. The company reported cement EBIT margin of 27.6% in Q4FY10, which is 1230 bps down YoY on account of lower realisation. However, the margin increased by 430 bps QoQ as realisation increased during the quarter. EBIT margin of the paper segment was reported at -14.5% in Q4FY10 as compared to -1.6% in Q3FY10. The fan division reported margins were down by 240 bps YoY to 14.4%.

Valuation
At the CMP of Rs 58, the stock is trading at 6.3x and 5.2x its FY11E and FY12E earnings, respectively. The stock is trading at an EV/EBITDA of 3.5x and 2.6x FY11E and FY12E EBITDA, respectively. On an EV/tonne basis, the stock is trading at $46 and $36 its FY11E and FY12E capacities, respectively. We are valuing the cement business at $42 per tonne (60% discount to the replacement cost) at its FY12E capacity of 5 MTPA and have arrived at a revised target price of Rs 64 with BUY rating.

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