Buy Orient Paper & Industries - Paper scripts a turnaround - Elara Capital

• Rating : Buy
• Target Price : INR87
• Upside : 55%
• CMP : INR56 (as on 16 November 2010)

Paper scripts a turnaround

Strong cement, electric durables volume drives topline

Orient Paper & Industries Limited (OPI) has reported a net sales growth of 8% YoY to INR3,829mn thanks to higher revenues from electrical consumer durables and the paper division. EBITDA margins, however, declined by 1520 bps YoY (1140 bps QoQ) to 4.9% due to lower margins from the cement business. Net profit declined YoY by 98.8% (98.5% QoQ) to INR 5mn on the back of lower EBITDA and an increase in depreciation expense.

Firm cement volume on capacity additions

OPI reported cement volume of growth of 31.1% YoY to 0.81 mn tonnes in Q2FY11. The company has grown 7.6x faster than industry during the quarter. The increment in volumes was mainly on the back of capacity additions and market share gain. However, on QoQ basis, the cement volume declined by 20.7% due to seasonal weakness. EBIT/tonne for cement stood at INR66 as compared to INR758 in Q1FY11 and INR981 in Q2FY10. Sequential decline in EBIT per tonne was primarily on account of the negative impact of operating leverage and lower realizations.

Maintain Buy with unchanged target price of INR87

At CMP of INR 56, the stock is trading at EV/tonne of USD35 on the FY12 capacity. Losses in the paper division have been acting as a drag on the overall profitability of the company for the past several quarters. However, with the paper division turning around at the EBITDA level (EBIT level losses of the operating plant i.e. Amlai cut down by 90% QoQ and 63.3% YoY) and cement prices showing a sharp increase, we believe earnings of the company will recover sharply in H2FY11. Cement prices in key markets of the company have gone up by INR25-100 per bag. Thus we are maintaining our 'Buy' rating on the stock with an unchanged target price of INR87.

Source : Equity Bulls

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