Value Buy: Orient Paper and Industries

Orient Paper and Industries
Recommendation: Buy
Price target: Rs80
Current market price: Rs46

Paper division affects profitability

Result highlights

* Orient Paper and Industries (Orient Paper) has reported an 11.5% year-on-year (y-o-y) growth in its net sales to Rs379.3 crore for Q4FY2008. The revenue growth was driven by the cement and fan divisions, which have reported revenue growth of 15.9% and 26.7% respectively for the same quarter. On the other hand, the revenues of the paper division declined by 18.1% to Rs60.1 crore in Q4FY2008.

* The reported operating profit margin (OPM) fell by 460 basis points year on year (yoy) to 21.7% mainly due to a decline in the profit before interest and tax (PBIT) margin of the paper division. The PBIT margin of the paper division dropped due to a shutdown at its Amlai paper unit in Q4FY2008. Consequently, the operating profit of the company declined by 8% yoy to Rs82.4 crore. The adjusted OPM for the quarter stood at 24.9%.

* The other income of the company declined by 71.8% to Rs2.5 crore due to the absence of income from the sale of certified emission reduction units (CERs). In the corresponding quarter in the previous year, the company had generated income from the sale of CER credit of Rs6.4 crore.

* The interest expense of the company declined by 65.7% to Rs3.13 crore due to debt repayment.

* The reported net profit of the company increased marginally by 0.3% to Rs48.1 crore during Q4FY2008.

* During the quarter under review, the company made a provision of Rs12 crore against receivables from its joint venture company in Kenya. In the corresponding quarter in the previous year the company had a prior-period item of Rs11.7 crore. Thus, the adjusted net profit of the company increased marginally by 1% to Rs55.8 crore in Q4FY2008.

* Orient Paper's expansion schedules are progressing well. The third phase of the capacity expansion (from 3.4 million metric tonne [mmt] to 5mmt) in the cement division; the 50-megawatt (MW) captive power plant (CPP) at the Devapur cement plant; and the expansion of the tissue paper capacity of the company by 15,000 tonne are expected to be commissioned as per schedule by the end of FY2009.

* We have revised our FY2009 net profit estimate marginally upwards by 1.1% and forecast a net profit of Rs281.1 crore for FY2010. We expect the company to generate earnings per share (EPS) of Rs11.5 and Rs14.6 in FY2009 and FY2010 respectively. High volumes from the capacity additions in the cement and paper divisions will be the primary drivers of the earnings growth for the company in FY2010. At the current market price of Rs45.95, the stock trades at 4x and 3.2x its FY2009 and FY2010 earnings estimates and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.3x and 1.9x for FY2009 and FY2010 respectively. The EV per tonne for the cement business works out to US$67 per tonne and US$25 per tonne for FY2009 and FY2010 respectively. Taking into account the low valuations at which the stock trades at present, we maintain our Buy recommendation on Orient Paper with a price target of Rs80.