Orient Paper & Industries Ltd Value unlocking through restructuring

CMP : 56 (Potential upside 94%)

A diversified company from CK Birla group stable, Orient Paper (OPIL) is engaged in the manufacturing of cement (5MTPA, 50MW CPP), paper and electrical appliances. OPIL is set to demerge its cement business to focus better in this growing sector and aggressively ramp up its product offerings and distribution network in its electrical appliance (EAP) business which along with paper business are to be hived off to a separate entity. OPIL is one of leading fans player in domestic market with good brand value and is one of the largest exporter of fans. The stock, pre-demerger stage, is providing an opportunity to investors to directly participate in a pure-play cement company, available at huge discount to the fair value. We expect post demerger, the cement valuation discount to the benchmark is set to narrow. The Company could consider selling the ailing paper business in future, which will help pursue in its core activities.
Basic stock data
Days High / Low (Rs) Weekly Avg Vol (NSE+BSE) Mkt. Cap. Full / Free Float (Rs Mn.) Monthly H/L (Rs) Yearly H/L (Rs) Outstanding No of Shares (mn) Face Value (Re)

Date : 23 May 2012

56.50 / 54.50 60,000 11,370/ 6,820 59.30 / 54.00 66.00/ 44.00 204.86 1

Share Holding Pattern (%)

Promoters Institutional investors Public Pledged share

March-12
37.50 32.05 30.45 12.36

Efficient cement business the main value driver: Cement unit, contributing
56% to the revenue stream, has been one of the most efficient one in the industry with FY12 operating EBIDTA/t at Rs1,171. OPIL has tight leash on its cost, stemming primarily from proximity to RM sources and strategic markets. 60% cement capacity ramp-up w/o equity dilution: The on-going Rs17.2bn cement capex (3MTPA) at Gulbarga, to be operational from FY15e to aid it consolidate its position in the southern market, where we expect the lull in business activity to fade post new govt formation at Center. The unit is being funded largely thru internal accruals and debt, will be an earnings accretive venture. Robust book to aid leverage for growth: Lower gearing (0.28) and higher Cash/Debt offers higher mileage in future leveraging at lower cost to pursue its organic/inorganic growth plan. Focused approach of restructuring to unlock value : Under a restructuring plan, entire business will be bifurcated into two entities namely, 1. Cement and 2. EAP & Paper to be listed (by Sept 12e) separately with mirror shareholding. The exercise could prove to be a value unlocking one, as the current Enterprise Value does not capture the value of cement business alone, thereby disregarding the value of EAP and paper business. Paper, currently a drag, can bring positive surprise: Paper division continues to bleed due to cost pressures, falling prices and lower volumes on operational issues (water shortage). We see, the demerger process as the best way forward for the management to exit the paper business under a separate entity and plough back the resources for pursuing its growth plans in growing appliances business, which as of now has seen limited offerings (fans & Lighting products). We see the current focus of the management to revive the ailing paper division (through setting up of a 55mw Captive Power Plant by June12 and measures to raise water availability to curtail operating costs) may have limited success, contingent upon fuel price (coal) easing off or dramatic rise in paper realization to offset fuel price. Recent correction in Coal price, though may help reduce cost. But we are not hopeful of paper realization jumping up significantly on rising competition. We hence, see these measures of management as futuristic, only to lure potential bidders for its paper business. Growing EAP unit: The Fan unit maintains it leadership in exports, plans capacity expansion. Premium CFLs and other appliances is being launched this year. We believe management is most likely to focus more attention to rev up existing dealer network to penetrate untapped territories. This business is marked by healthy competition due to huge market opportunities. Valuation: Our estimates point to the cement business valuation (EV) at $30-35/t, which is steep discount of 75% to the ruling replacement value benchmark of $120/t. We believe this anomaly is set to correct, post demerger given healthy plant utilization level of 75% with best of the industry margins. Basically, the cement business has been all along supporting the working capital needs of the ailing paper business. With cement business set to be demerged by Jun12e, such crossfinancing would not be the case, which could result in re-rating of the stock. The Company has not provided the abridged balance sheet of the resulting company (cement). The management has guided us that the full balance sheet of the same would be made available in June. We have estimated the debt level of the cement unit by applying the corporate interest rate (11%). We have arrived at valuation of different units at most conservative basis, taking peer valuation matrix into account. Relative valuation methodology has been followed. Our estimates are based on FY12 audited results. We would follow-up the story post demerger. We advise investors to go for staggered buying, as monsoon to set in soon, which may see 58% correction in the stock price. At the current price the stock holds 94% upside potential.

Yearly Performance (Rs mn)

Revenue Operating Profit PAT

FY12
2,433 338 212 13,729 7,239 3,286 79 3,778 530 (643) 5

FY11
1,928 237 143 10,310 6,164 2,744 61 2,338 577 (329) 7

change
26% 43% 48% 33% 17% 20% 29% 62% -8%

Segmental Revenue
Cement EAP (Electrical Appliances) Paper Others

Segmental Operating Profit

Cement EAP Paper Others

-31%

Segmental ROCE
Cement EAP Paper Others 37% 21% -15% 35% 25% 28% -10% 72%

Valuation Summary (Rs mn)

Cement EAP Paper Total 17,845 3,620 822 22,286 11,480 94%

Current Market Capitalisation Potential Upside Valuation Assumptions

Cement (Replacement Value)-EV/t EAP (Price / Sales) Paper (Price / Sales)

Benchmk Discount applied

$120/t 42%

50%
30%

0%
5%

Analyst- Surya Narayan Nayak, AVP Research (022-30225900) surya.nayak@networthdirect.com

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Key to NETWORTH Investment Rankings

Buy: Upside by>15, Accumulate: Upside by +5 to 15, Hold: Upside/Downside by -5 to +5, Reduce: Downside by 5 to 15, Sell: Downside by>15
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