Orient Paper & Industries - Getting bigger and better

[INSERT_1]

It would surprise many to see Orient Paper & Industries (OPIL) being recommended as our choice scrip at a time when its yearly profits have declined and with one of its divisions running into losses. However, the worst seems to be priced in.

Major initiatives such as the expansion of its product portfolio and business restructuring, the details of which are awaited, could act as positive triggers. Besides, the scrip is currently available cum dividend of Rs 1.50 per equity share of dividend that it declared recently, which results in a dividend yield of 2.56 per cent. All this makes OPIL a good buy at Rs 57.

OPIL is a diversified company with interest in cement (53 per cent of revenue), electrical and consumer durables (ECD) (33 per cent) and paper (14 per cent). There are reasons why we believe the OPIL scrip should do well.

First, its capex plan is very impressive. OPIL is expanding its cement capacity from five MTPA to eight MTPA. It is setting up a greenfield plant at Gulbarga, Karnataka, which includes a 40 MW power plant at a total cost of around Rs 1720 crore. M L Pachisia, Managing Director, OPIL, tells us that the land acquisition for this would be completed in the current fiscal itself. In the ECD segment too OPIL’s fan capacity rose by 20 per cent in FY11 to 60 lakh units and will go up to 80 lakh units in FY12. The ECD segment has performed quite well in FY11 with sales of 65 lakh units. All this will add up to its growth.

But the icing on the cake comes with the management’s decision to increase its product portfolio to include mixers, geysers, coolers and room heaters, etc. Pachisia remained silent on the company’s strategy, capex and funding of this project, but he did mention that the launch of these products would happen in FY12 itself. Considering OPIL’s expertise in electrical consumer durables and strong branding, these products could turn into money-spinners for the company.

The paper division, a laggard in the last three years, is also expected to improve its performance as the management is addressing issues like water shortage that have been plaguing it for quite some time. In fact, a 55 MW captive power plant is being set up for the unit to reduce its power cost too. All this should help the paper division to post better numbers and provide scope for a turnaround in the coming period. But the most important factor is the board’s decision to restructure its business.

DSIJ had earlier said that OPIL could enjoy better valuations if it could separate and unlock value in its business divisions. This may now be a reality. However, Pachisia stated that OPIL is currently evaluating various restructuring options.

On the financial front, for Q4FY11 OPIL’s revenues increased by 28.52 per cent to Rs 709.82 crore (`552.29 crore) while profits increased by 41 per cent to Rs 77.47 crore. This was on account of a better showing by the cement division with better realisations and the ECD division on account of strong volume growth. On the valuation front, the scrip is available at EV/EBDITA of 6.50x and PE of 7.88x its FY11 profits, at which the scrip looks like a good buy with a one year target of Rs 70.