Orient Paper Net up 12 Per Cent, Demerger To Benefit Existing Shareholders

Orient Paper & Industries (OPIL) has posted decent numbers for the March quarter wherein its topline grew by 23 per cent to Rs 936 crore while the bottomline posted a moderate 12 per cent rise to Rs 86 crore. Its EBITDA margins took beatings of 118 basis points mainly due to the input pressure.

The company has three business segments viz. cement, paper and electrical. The cement business brings in 50 per cent of the total revenues while the paper and electrical businesses add 13 per cent and 37 per cent to the total revenues respectively. During the quarter, its revenues from the cement business grew by 26 per cent on a YOY basis. The growth in the paper business was 13 per cent while that in the electrical business was a healthy 23 per cent. The earnings before interest and tax margins (EBIT margins) in the cement business remained in line with the marigns posted in a year-ago period i.e. 31 per cent. The electrical business reported a fall of 138 basis points in the margins while its paper business made a loss on the EBIT level.

The expenses related to raw material and depreciation reduced while stock-in-trade and traded goods increased during the quarter. The power & fuel cost, which constituted 16 per cent of the total expenses, rose by 34 per cent on a YoY basis. Its other income during the quarter doubled to Rs 7.8 crore from Rs 3.54 crore in the same period last fiscal. The interest expense was slightly higher at Rs 14.96 crore from Rs 13.75 crore in the year-ago period. The taxes paid were higher by 43 per cent on a YOY basis. The effective tax rate was 36 per cent compared to 30 per cent in the March quarter last fiscal.

During the quarter the company allotted 1.2 crore equity shares to its promoters due to which there has been equity dilution of 5 per cent. The promoters’ stake in the company has gone up from 33.61 per cent in December 2011 to 37.50 per cent in March 2012. An impact of this is that the earning per share has grown by 10 per cent compared to 12 per cent growth in net profit. The company has also recommended dividend of Re 1 on a face value of a similar amount. Earlier too it had recommended a dividend of Re 1 so that the total dividend is now Rs 2, which gives an effective dividend yield of 3.5 per cent.

The company has a long-term debt of Rs 148 crore while its short-term debt amounts to Rs 236 crore. The total debt has come down from Rs 459 crore to Rs 385 crore in a one-year period. The debt to equity ratio has also come down from 0.33x to 0.25x.

With effect from April 1, 2012, its cement business, which contributes up to 50 per cent to the topline and 100 per cent to the bottomline, becomes demerged. This is subject to legal approval by the court. Its existing shareholders will, on one share of OPIL, get one share in the cement business.

The cement business has a production capacity of 5 MTPA which would command a PE of aboout 8-9x. Its cement business in the year FY12 made a profit of Rs 237 crore which gives us a market cap of Rs 1896 crore for the cement business. This implies that the existing shareholders would get one share in Orient Cement valued at Rs 92. Considering that the share price of OPIL would tank heavily after the demerger, investors should still make money in Orient Cement. This business looks in good shape and the proposed demerger would unlock the value. We advice the readers enter the counter at the current level.