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Cement Play

Orient Paper and Industries is dragged down by its loss-making paper business…

Orient Paper and Industries Ltd (OPIL), a C K Birla company, is primarily a cement manufacturing company with a 5MTPA capacity. Its cement business is one of the most efficient in the country enabling the company to earn healthy cash flows. However, other businesses like the loss making paper are a drag.

Efficient cement business: OPIL has been one of the most efficient cement manufacturers with an Ebitda/tonne of Rs 1,134 (Q1FY13). Cement currently brings in 60 per cent of the company’s revenues. Cement revenues for Q1FY13 were higher by 23 per cent (y-o-y) on the back of better realisations (up 9 per cent) and higher volumes (up 13 per cent y-o-y). Yet, cement margins came under pressure because of coal shortages, higher cost imported coal, higher coal royalty and other expenditures. In total, these had an impact on lowering Ebitda (cement) by around 10 per cent (y-o-y).
The company’s ongoing Rs 17.2 billion cement capex (3MTPA) plant at Gulbarga, expected to come online by FY15, should help OPIL strengthen its grip in the southern market. This would increase current capacity by 60 per cent being funded largely by internal accruals and expected to be earnings accretive once operational.

Demerger gains: The company is under process of a demerger that would see it becoming two entities – one for the cement business and another for the EAP and paper business. The cement business is expected to be listed on the exchanges in a couple of months after share allotment in September 2012. Analysts believe listing of the cement business should help unlock value as the present combined entity does not fully reflect the value of the efficient cement business that OPIL management runs. The reason for that is that the profitable cement operations currently fund the loss making paper division. Analysts expect that post demerger, the cement company would not lose precious cash flow into these other operations.

Paper pains: OPIL’s paper business, which contributes about 12.5 per cent of the company’s topline, is its Achilles’ heel. Even though the paper business saw a revenue growth of 61 per cent in Q1FY13 (y-o-y), Ebit losses of Rs 16 crores bled the company’s combined bottomline. Higher pulp prices and higher coal costs were blamed for the current loss. The company has plans to commission a 55 MW power plant in the second half of the current year to ease costs but not all analysts are enthused. With the outlook for paper realisations remaining weak and limited coal price softening ahead, this may be the company’s strategy to exit the paper business with a higher bid.

Outlook and valuations: Orient is now a demerger play. The company could see some value unlocking post demerger for its efficient cement business. At the CMP, the stock trades at an undemanding six times its TTM earnings.Buy.