Orient Paper and Industries - Hiving off cement key trigger; Buy - Anand Rathi

We expect Orient Paper and Industries' EBITDA and PAT to drop 49% and 54% yoy respectively due to a drop in profitability in cement. Paper losses will continue while the electrical division is expected to deliver strong profits. The hiving off of the cement business (expected by 4QFY13) and revival of the paper business are immediate triggers. We maintain a Buy rating.

- Subdued performance expected. Revenue is expected to rise 2% yoy while EBITDA and PAT are expected to drop 49% and 54% respectively due to a drop in profitability in cement. We estimate cement PBIT margins to drop to ~16% (24% yoy, 17% qoq). Dispatches are expected to be down 8% yoy and qoq due to lower demand in the industry. Average realisation is expected to be down 1% yoy (4% qoq) to Rs.3,450 a ton.

- Paper pressure to continue; electricals to bounce back. Losses in paper are expected to continue due to industry-wide issues of low realizations and higher raw material prices. The new 55 MW plant is being stabilized and should be fully operational by 4QFY13. Electricals revenue is expected to grow +30%, with PBIT growth at +90% as 3QFY12 had onetime charges due to consultancy fees.

- Key updates. The Orissa High Court has approved the hiving off of the cement division w.e.f 1 Apr'12. The company has applied to the court for extension, given the delay in receiving the certified order. This would be followed by allotment of the company's shares and its subsequent listing.

- Valuation. The splitting off of the cement business along with the revival of the paper business are immediate triggers. Steady performance of the electricals business and low gearing are fundamental positives. Our sumof-parts target is Rs.102: Rs.88 for cement at 6x FY14 EV/EBITDA (EV/ton: US$75) and Rs.13/Rs.1 for the electricals/paper businesses at 5x and 3x EV/EBITDA. Risk. Lower paper production.

Source : Equity Bulls

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