Orient Paper & Industries - Demerger no bar; reiterate BUY - Religare

We discussed the impending demerger of the cement business with OPI's management - while this process is likely to take another 3-5 months, we recommend that investors buy the stock at this time as OPI remains one of the most cost-efficient mid-cap cement players in the country, with strong long-term upside potential. We roll over to a new September'13 TP of Rs 100 (26% upside) from Rs 90 earlier, which includes a value of Rs 88 for the cement business. BUY.

- Demerger date nearing: The demerger of OPI's cement business was delayed due to the retirement of the Court judge overseeing the matter. Now that a new judge has been appointed, a court order is expected shortly, after which the company will instantly approach the Registrar of Companies (ROC) and then the exchanges to obtain a record date and make allotments. Management expects this process, culminating in the re-listing of Orient Cement, to take another 3-5 months.

- Power cost relief in Q3: During Q2, coal cost rose as lower linkage coal availability led to higher imports. As per the management, the supply situation has improved for now, with imported coal levels at ~10% of total requirements versus peak levels of 20% last quarter - this is likely to reduce power cost QoQ.

- Stock still holds meaningful upside; BUY: We have trimmed our FY13/FY14 earnings estimates by ~12% on lower margin assumptions and value the company at an SOTP-based TP of Rs 100, as follows: (1) cement business at 4.5x EV/EBITDA one-year forward (Rs 88), (2) electrical and fan business at 5x EV/EBITDA and (3) paper business at 0.5x EV/Sales (Rs 12). Our target price of Rs 100 implies an upside of 26% and we maintain our BUY rating. OPI has been a laggard relative to other mid-cap scrips owning to the demerger overhang - with long-term fundamentals intact and the demerger date nearing, we recommend that investors accumulate the stock.

Source : Equity Bulls

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