>ORIENT PAPER

Recommendation: Buy

Target Price: Rs81

CMP: Rs65

Upside: 24.7%

Margins disappoint; maintain Buy on attractive valuations

Orient Paper & Industries’ (OPIL) Q1FY13 result was below expectations primarily due to lower margin in the cement business (EBIT margin declined 11pp YoY and 7.2pp QoQ). Cement business margin was under pressure due to higher energy cost (due to lower availability of linkage coal and increase in royalty on coal) and higher other expense (Rs110mn was spent on replacement of cement roller mill). EBITDA margin during the quarter was at 13.3% vs. est. 18.7%. As per the management, availability of linkage coal had improved and it was not importing coal as of now. It also expects the margin of the electrical business to improve going ahead with higher volumes in the CFL and Kitchen appliances business. The company has received the High Court’s approval for de-merger of the cement business and the share allotment process is expected to be completed by the end of Sept ‘2012. We believe that de-listing will unlock shareholders’ value and the company will attract better valuation for the cement business. We have revised our earnings estimates upwards by 9.9%/13.2% for FY13E/FY14E considering higher cement prices in key markets of the company. We maintain Buy on the stock with revised price target of Rs81 (earlier: Rs76), upside of 24.7% from the CMP.

m  Margins disappoint led by lower margins in the cement and electrical business: Revenues of the company increased 23%YoY to Rs6,569mn driven by 9.5% YoY/11.6% YoY/60.8% YoY growth in cement/electrical/paper business. EBITDA declined 15.2% YoY to Rs877mn led by lower margins in the cement and electrical business. EBIT margin of the cement business was down 11pp YoY (and 7.2pp QoQ) to 23.4% primarily due to higher energy cost and other expenses. EBIT margin of the electrical segment declined 3.7pp YoY to 3.7% mainly due to higher competition in the CFL and Kitchen appliances segment. Profit declined 17.7% YoY (and 43.5% QoQ) to Rs489mn.

m  Paper division’s dismal show continues: Though revenues from the paper division grew 60.8% YoY to Rs816mn, it continued to report EBIT level loss due to higher pulp prices and rise in coal costs. EBIT loss from the paper division was Rs159mn in the quarter against a loss of Rs229mn in Q1FY12. The management expects the margin from this segment to improve with the commissioning of 55MW power plant in 2HFY13.

m  Earnings estimates revised upwards: We have revised EPS estimates upwards by 9.9% to Rs11.2 for FY13E and 13.2% to Rs13.1 for FY14E considering improvement in cement realizations in its key markets. 

m  De-merger to unlock shareholders’ value: The company has received the High Court’s approval for de-merger of the cement business into a different company, “Orient Cement Ltd”. As per the management, allotment of shares for the new company should be completed by the end of Sept ’12 and after that, listing of Orient Cement should be completed in next 3-4months. We believe that de-merger of the cement business will unlock shareholders’ value in future and both companies will be able to independently pursue their growth plans.

m  Valuations attractive, maintain Buy: The stock trades at 5x FY13E EPS, 3.4x EV/EBIDTA, and EV/tonne of US$51.5. We maintain Buy on the stock with revised price target of Rs81, upside of 24.7% from the CMP.


RISH TRADER