Orient Paper - Cement & Paper businesses disappoint - Centrum

Orient Paper & Industries' (OPIL) Q2FY13 result was sharply below expectations primarily due to a) steep decline of Rs292/tonne in cement realization against our estimates of decline of Rs77/tonne QoQ and b) Higher losses in the paper segment (EBIT level loss of Rs250mn vs. est. Rs201mn). Sharp decline in cement realization led to the cement segment's EBITDA of Rs715mn (vs. est. Rs805mn) and EBITDA margin of 20.1% (vs. est. 21.1%). Subdued performance of the cement and Paper businesses resulted in EBITDA of Rs417mn (vs. est. Rs693mn) and EBITDA margin of 7% (vs. est. 11%). Going forward, we expect margins in the cement business to improve in Q3 led by price hikes in Andhra Pradesh market (In Hyderabad, current retail price is ~Rs270/bag compared to lows of Rs225/bag in early September). Electrical segment's margin is also expected to improve in Q3 and Q4 due to seasonal improvement in fan sales. We have revised our earnings estimates downwards by 8.4%/7.3% to Rs9.7 and Rs11.2 for FY13E and FY14E respectively considering lower margins in the electricals and cement businesses. The company has received the High Court's approval for demerger of the cement business and the share allotment process is expected to be completed by the end of Oct '2012. We believe that de-listing will unlock shareholders' value and the company will attract better valuation for cement business. We maintain Buy on the stock with a revised price target of Rs90 (earlier: Rs101), upside of 17% from CMP.

- Margins disappoint led by sluggish performance of cement and paper business: Revenues of the company increased 18.1%YoY to Rs5,984mn largely driven by 21.3%/ 20.8% YoY growth in cement/electrical business's revenues. EBITDA declined 25.1% YoY to Rs417mn led by lower margins in all key business segments. EBIT margin of the cement business was down 2.6pp YoY (and 6.8pp QoQ) to 16.6% primarily due to higher energy cost (Rs969/tonne against Rs799/tonne in Q2FY12). EBIT margin of electrical segment declined 1.3pp YoY to 0.6pp led by costs related to setting up of distribution network (for home appliances segment) and increased geographical reach. Profit declined 20.6% YoY (and 60.9% QoQ) to Rs191mn.

- Paper division's dismal show continues: Though revenues from paper division grew 1.6% YoY to Rs778mn, it continued to report EBIT level loss due to higher pulp prices and rise in coal costs. EBIT loss from the paper division increased to Rs250mn against Rs149mn in Q2FY12. The management said that higher costs related to power plants were the reason behind the increased loss and expected the operating cost to come down with stabilization of 55MW power plant in 2HFY13E.

- Earnings estimates revised downwards: We have revised EPS estimates downwards by 8.4%/7.3% to Rs9.7 and Rs11.2 for FY13E and FY14E respectively considering lower margins in the electricals and cement businesses. We expect EBITDA margin of cement business to be 24.5% in FY13E against 28.8% in FY12 led by higher energy and freight costs.

- Valuations attractive, maintain Buy: The stock trades at 6.9x FY14E EPS, 4.4x EV/EBIDTA, and EV/tonne of US$59. We maintain Buy on the stock with a revised price target of Rs90, upside of 17% from CMP.

Source : Equity Bulls

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