Orient Paper and Industries – Subdued 2Q, Buy.: Anand Rathi

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Orient Paper and Industries – Subdued 2Q, expect cement-led recovery in 2HFY11; Buy.





 2QFY11 results. Orient’s net profit was lower than our estimate,
mainly on lower profitability from Cement. Net profit declined 99%
yoy to `5m. We expect recovery in 2HFY11 led by Cement (recent
price hike in the South). Paper turnaround is also visible as
production has stabilized at Amlai, Madhya Pradesh. Maintain Buy.



 Revenue growth at 8% yoy. Revenue grew 8% in 2QFY11, driven
by 15%/26% yoy growth in the paper/electrical divisions. Cement
revenue was lower 3% yoy and 35% qoq due to drop in realizations.


 Cement decline. Overall operating and net performances were
impacted mainly by the cement division. Pricing pressures (NSR
down 26% yoy, 16% qoq) led to EBITDA/ton of ~`110 (`1,030
yoy; `780 qoq) despite volume growth of 31% yoy (0.81m tons).
We estimate cement price recovery (in the South) coupled with
higher volumes to lead to EBITDA/ton of `600-700 in 2HFY11.


 Paper resurrects; Electrical under pressure. Paper production
loss was curtailed in 2QFY11 (leading to lower EBIT loss) due to
commencement of operations at the Amlai plant. The plant has
stabilized and is expected to reach healthy utilization levels during
2H, leading to robust profitability. To avoid production loss, two
water reservoirs with combined capacity of 250m gallons have been
built. Electrical EBIT margin at 5.2% was lower than our estimate
(down 660bps yoy and 190bps qoq) owing to raw material (copper,
aluminium and steel) cost pressure and dealer promotion expenses
of `40m (normally done in 3Q). Volumes of fans grew 30% yoy.


 Valuations. Our SOTP-based target price stands at `85: `66 for
Cement at 4.5x FY12 EV/EBITDA (implied EV/ton: US$60) and
`15/`4 for Electrical/Paper at 4x/3x EV/EBITDA.