Orient Paper Industries Ltd. - Value Pick

No. of shares – 19,28,05,900

Equity – Rs.19.28 Cr

Promoter Holding – 33.86

FII - 1.64

MF/UTI - 19.92

Insurance/Bank - 9.66

Body Corporate - 17.24

Public & Others - 17.68

52wk H/L (Rs) - 61.25 / 18.40

CMP – Rs.54.30

Orient Paper Industries Ltd. (OPIL) a part of CK Birla Group is a diversified conglomerate operating in 3 segments:

1) Cement (60% of its revenues)

2) Electrical Consumer Durables (20% 25% of its revenues)

3) Paper & Board (15% 20% of its revenues).

OPIL’s final phase of expansion of cement capacity from 3.4 MT to 5.0 MT is scheduled to be completed by Nov. 2009. It has already expanded its clinker capacity to 3.4 MT in June, 2009.

OPIL has also set up a captive power plant with a capacity of 50MW, of which 25 MW has been commissioned in Aug. 09 & another 25 MW will be commissioned by Nov. 2009. It is also planning to set up another 43 MW plant to meet the enhanced need of steam & power for its paper plant.

OPIL has also expanded the tissue paper capacity by 15 000 MTPA to 25 000 MTPA To further 15,000 25,000 MTPA. improve margins from tissue paper, the company has finalized plan to convert soft tissue into the final products like toilet paper rolls, facial tissue, napkins, etc.

OPIL is considering a Greenfield Cement project at its closed paper plant at Brajarajnagar, where its existing infrastructural facilities like land, water & power can be used for the new project.

Financials:

During Q2FY10, OPIL’s Revenues were flattish at Rs. 3551.2 mn. Its EBIDTA decreased by 17.9% to Rs.730.8 mn, while its EBIDTA margins decreased by 460 bps to 20.6%. Its standalone APAT stood at Rs.405.4 mn registering a fall of 26.6%.

During HIFY10, OPIL’s net sales grew by 3.8% to Rs.702.1 Cr. Its EBIDTA fell by 21.7% to Rs.138.2 Cr, while its EBIDTA margins fell by 640 bps to 19.7%. Its APAT fell by 33.6% to Rs.74 Cr.

This was mainly due (1) prolonged shut down of the paper plant for up gradation of the pulp mill (2) lower clinker production because of shut down of both its cement plants (one for up gradation and the other for relining), which was partially made up by purchase of clinker at higher cost, which resulted in lower value addition. Now, all the plants are fully operational.

Considering its weak H1FY10 performance, we expect its FY10 APAT to fall by 17.8% to Rs.206.4 Cr. Going forward, for FY11, while the capacity addition in cement business & robust growth in its Electrical division to result in strong Revenues growth, after factoring in a 5% fall in cement prices & increased interest & depreciation costs, its FY11 PAT growth to be just at about 1% can be expected. However, we expect FY12 to be a very high growth year for OPIL.

Estimate Performance: (Figs in Million)

Y/E March - FY08, FY09, FY10E, FY11E

Revenue - 13786.7, 15083.6, 16006.4, 18763.0

PAT - 1907.5, 2510.7, 2063.9, 2066.0

EPS (Rs) - 9.9, 13.0, 10.7, 10.7

EBIDTA Margin (%) - 24.7, 26.1, 22.2, 20.1

Net Profit Margin (%) - 13.8, 16.6, 12.9, 11.0

Reserves - 5533.5, 6328.1, 8050.0, 9773.9

Cash and Bank – 270.8, 338.2, 443.3, 1628.

Business:-

OPIL’s Paper plant at AMLAI, Madhya Pradesh has manufacturing facilities to produce a variety of grades and types of papers. It plans to carve out an important niche not only in the Indian market but in several other countries as well. Its paper products are being regularly shipped to Africa, Middle East, Bangladesh, Sri-Lanka & Nepal.

“Orient fans” as it is known, started with a production of a mere 15,000 fans a year, has today grown to a production capacity of over 4.5 million units, covering a wide range of Ceiling Fans, Table Fans, Wall Mounted Fans, Stand Fans, Exhaust Fans and Multi Utility Fans and is the largest manufacturer of fans in India. Orient Fans is an undisputed leader in the subcontinent with its presence in over 20 countries worldwide. It alone contributes to nearly half of India’s organized sector fan exports. It also provides technical know-how to a few companies in Africa and Gulf.

OPIL has already submitted a feasibility report for its Greenfield cement plant in Sundergarh district of Orissa. The Greenfield venture at Sundergarh would have a capacity of 8000 tons per day (TPD) of clinker production and 6000 TPD of grinding. OPIL also plans a Brownfield venture at its existing closed paper unit at Brajarajnagar in the same district. The total investment cost is Rs.12 bn for both the plants, of which Rs.1.8 bn is for Brajarajnagar unit and the rest for Greenfield venture. OPIL plans to invest 50% of the fund through internal accruals & the rest 50% would be borrowed from banks and Financial Institutions.

Risks & Concerns:-

1) Deteriorating quality and rising cost of coal continue to be areas of serious concern. OPIL has approved linkage which covers 75% of their requirement of coal for cement production and the rest 25% they have to buy through auctions or from private parties at substantially higher prices. Therefore, landed cost of coal, which is one of the major ingredients of cement costs, continues to be uncertain.

2) According to Cement Manufactures Association about 62 mn tonnes of cement capacity is scheduled to come on stream by the end of FY10. Excess supply coming up in the overall industry could lead to fall in cement prices as well as result in lower capacity utilization.

Investment Proposition:

Here we have the well diversified business, offering ample of opportunities for growth in future in each segment, available at P/E of just 5. Apart from that, the company has strong pedigree (Birla management) which can create gold out of soil. OPIL has given dividends consistently for last 3 years; last one being 150% or Re.1 per share. The company is available at P/E of just 5 and there is a scalability of the business which will happen from 2011. So even if we give PE of 10, as per the industry standards, OPIL should be quoted at around Rs.100, So I think is a very good investment proposition.