Buy Orient Paper - Demerger to unlock-value - Elara Capital

Ex-date likely to be announced in a month

Orient Paper & Industries (OPI) is likely to announce ex-date & record date for Orient Cement share within one month. As per scheme of demerger every shareholder of OPI will get 1 equity share of Orient Cement (OCL) for each equity share in OPI, in addition to the existing OPI shares. Listing of OCL share is likely to take 4 months from the ex date. The paper unit, electrical consumer durables unit, land bank at Brajrajnagar (in Orissa) and investment (in Century Textiles & Hyderabad industries) will remain in OPI while cement business will be transferred to OCL. FY13 net profit of OCL and OPI is estimated to be INR2.5bn and INR- 0.2bn respectively.

OCL's fair price appears to be INR85 per share

OPI Cement plants are among the most cost efficient plants in India. The cement business of the company has consistently earned higher margins(65% + higher) and RoCE (200%+ higher) as compared to most peers. Most mid-sized cement companies are presently trading at EV/tonne of USD60. Due to superior fundamentals we expect cement business to trade at ~25%. Based on EV/tonne multiple of USD75 our target price works out to INR85 per share.

OPI fair price appears to be INR21 per share after ex-date

We have valued paper business at EV of INR1.65bn. Our valuation of paper business is at 50% discount to loss making company Sirpur Paper. We have also valued consumer durables business at 50% discount to Bajaj Electricals and investment at 30% discount to market cap. Our target price for OPI, based on the calculations, works out to INR21 per share

CPP for paper business to improve cost structure and valuations

Going ahead we expect profitability of paper business to improve as company has added 55MW captive power plant. This will be sufficient to meet total requirement of not only the paper plant but also the caustic chlorine plant, which is currently dependent on expensive grid power. Upon stabilisation, the project is likely to result in savings of INR 300-350mn annually.

Valuations and Outlook

At CMP of INR77, the stock is trading at FY14 EV/EEBIDTA of 3.2x, P/E of 5.5x and P/BV of 1x. We expect earnings of the cement business to improve in H2FY13 as the cement demand and prices have improved over the past few weeks on account end of monsoon season. With demerger on the cards, the losses of paper business are no longer likely to be a drag on cement business valuations. We maintain "Buy" rating on the stock with price target of INR106.

Source : Equity Bulls

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