Orient Paper & Ind Q3FY13 Result Update :: Centrum

Operating profit in-line with estimates; maintain Buy
Orient Paper & Industries’ (OPIL) Q3FY13 operating profit came at Rs388mn (vs. est. Rs376mn) and op. margin was at 6.5% (vs. est. 6.1%). Revenue during the quarter was at Rs5.9bn (vs. est. Rs6.2bn) due to the electrical division’s revenue of Rs1.6b (vs. est. Rs1.7bn) and paper segment’s revenue of Rs862mn (vs. est. Rs973mn). Profit during the quarter was at Rs147mn, 10% below our estimate of Rs163mn due to higher interest cost (16.2% QoQ increase) and higher depreciation cost (5.3% QoQ) increase. Captive power plant of 55MW for the paper business has been commissioned on Dec 1, 2012, which is expected to yield savings of Rs300mn annually as per the management. Though, the electrical segment’s margin is expected to improve in Q4 due to seasonal improvement in fan sales, continued pressure on cement price leads us to trim our earning forecasts. The management indicated that current cement price in its key markets were below the average realization of Q3FY13. Cement business’ margin was impacted due to lower availability of linkage coal (45% of total requirement despite having a linkage to the extent of 75%) and higher freight cost. We have revised our earnings estimates downwards by 9.8%/6.5% to Rs10.1 and Rs12.5 for FY14E and FY15E respectively considering lower margins in the electrical and cement segments. The company is awaiting High Court’s approval for de-merger of the cement business and expects the process to get completed in the next 2-3 months. We maintain Buy on the stock with a revised price target of Rs88 (earlier: Rs90), upside of 21% from CMP.
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Margins disappoint led by sluggish performance of cement and paper segments: Revenue of the company increased 3.1%YoY to Rs5,936mn driven by 19.5% YoY increase in revenue of the electrical segment. EBITDA declined 56.5% YoY to Rs388mn led by lower profit in the cement segment and increase in EBIT level loss of the paper business. EBITDA margin of the cement business was down 10.2pp YoY (and 2.3pp QoQ) to 17.8% primarily due to higher energy (Rs988/tonne against Rs875/tonne in Q3FY12) and freight (Rs759/tonne against Rs694/tonne in Q3FY12) costs. Paper business reported EBIT level loss of Rs236mn against Rs153mn in Q3FY12. Due to sluggish operational performance, Profit declined 65.4% YoY (and 23.2% QoQ) to Rs147mn.

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Paper division’s dismal show continues: Paper business of the company continued to report EBIT level loss due to higher pulp prices and rise in coal costs. EBIT loss from the paper division during the quarter was at Rs236mn against Rs153mn in Q3FY12. The company has commissioned a 55MW power plant for its paper business, which is expected to yield savings of Rs300mn annually as per the management.
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Earnings estimates revised downwards: We have revised EPS estimates downwards by 9.8%/6.5% to Rs10.1 and Rs12.5 for FY14E and FY15E respectively considering lower margins in the electrical and cement segments. We expect EBITDA margin of cement to be ~24% going forward against 28.8% in FY12 led by higher energy and freight costs.
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Valuations attractive, maintain Buy: The stock trades at 7.2x FY14E EPS, 4.6x EV/EBIDTA, and EV/tonne of US$55.9. We maintain Buy on the stock with revised price target of Rs88, upside of 21% from CMP.