Emkay:: Buy Orient Paper & Industries - Results marginally below estimates

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Orient Paper & Industries Ltd

Results marginally below estimates

BUY

CMP: Rs 50                                       Target Price: Rs 77

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n     Net profit at Rs309mn (+2.2% yoy) slightly below estimates of Rs329mn. Revenues at Rs4.38bn (+18%), Cement (+7.4%), Electricals division (+40.6%) & Paper division (+22.6%)

n     Cement revenues grew 7.4% yoy to Rs2.28 bn as realizations improved 13% yoy and 17% qoq led by price hikes in OPIL’s key markets of AP and Maharashtra

n     Paper division witnessed sharp turnaround in profitability with positive EBIT (Rs24 mn) after 7 consecutive quarters of losses as the Amalai paper plant witnessed stabilization

n     OPIL on the verge of earnings recovery led by recent cement price hikes in its key markets and turnaround of paper division. Maintain BUY with TP of Rs77

Revenues grow by 18% - cement division (+7.4%), electricals (40.6%)

Revenues at Rs4.38bn grew by 18.1% yoy, driven by 7.4% growth in Cement revenues

(Rs2.28 bn), 40.6% growth in electricals division (Rs1.18bn) and 22.6% growth in Paper

division (Rs0.89bn) respectively. Cement volumes declined 4.9%yoy. However

realizations grew 13%yoy & 17% qoq to Rs2690/t and helped revenues growth of 7.4%.

Revenues from paper division at Rs891 mn were up 22.6% yoy as the Amalai paper

plant saw stable production.

EBIDTA grew by 10.1% led by sharp turnaround in paper division

EBIDTA for the quarter at Rs741 mn , registered a growth of 10.1%yoy, above

estimates (Rs711 mn) on account of better than expected profit from paper division

(Rs24 mn v/s est loss of Rs37 mn) and Electricals division (Rs100mn vs est of

Rs88mn). Paper witnessed sharp turnaround in profitability with positive EBIT after 7

consecutive quarters of losses. Overall EBIDTA margins at 16.9% though lower by

123bps on yoy basis, improved significantly by 1200bps sequentially. Margins of

electricals division at 8.4% improved 60 bps yoy .

Net profit +2.2% yoy

Lower than expected other income (Rs 36mn vs est of Rs70mn) and higher interest

costs (up 5.7%) and depreciation (up 27.1%) dragged OPIL’s net profit to Rs309mn

(+2.2%yoy) slightly below estimates (Rs329 mn).

Segmental performance

Cement

Revenues from cement segment grew 7.4% yoy to Rs2.28 bn as realizations improved 13%

yoy even though there was a 4.9% decline in volumes. Volumes at 0.85mnt declined 4.9%

as key markets of Andhra Pradesh faced slower offtake led by continuing political

turbulence in the state as well as unseasonal rains and shortage of raw materials like sand

disrupted construction activities in both AP and Maharashtra. Cement realizations however

grew by 13% yoy (Rs2690/t) led by a series of price hikes witnessed in this quarter.

However even after a sharp jump in realisation, at the EBIT level, the division registered a

6% decline to Rs466 mn - below estimates of Rs520 mn due to lower than estimated

realisations.

Paper division

Revenues from paper division at Rs 891mn, up 22.6% yoy were better than estimates of

Rs870mn. The division witnessed sharp turnaround in profitability with positive EBIT (Rs24

mn) after 7 consecutive quarters of losses as the Amalai plant witnessed stabilization in

production. The division is expected to improve performance with further scale up in the

production expected in Q4FY11.

Electrical Division

Electricals division continued its impressive topline performance with revenues of Rs 1.18

bn (+40.6% yoy). EBIT at Rs100mn came in better than estimates of Rs88 mn , posting a

growth of 51.1%yoy. Also margins of 8.4% improved by 60bps yoy and 320bps on

sequential basis.

OPIL on the verge of sharp earnings recovery - Maintain BUY with price

target of Rs77

We believe OPIL is on the verge of a sharp earnings recovery, led by recent hikes in

cement bag prices in OPIL’s key markets and turnaround of Paper division. At CMP the

stock is trading at 7.5x FY11 and 5.5x FY12 earnings. Maintain BUY