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.

Value Buy - Orchid Chemicals

Orchid Chemicals & Pharmaceuticals, is into manufacture of API and Formulations with 2 API manufacturing units, one each at Chennai and Aurangabad, 3 Dosage Formulations units at Chennai and 2 R&D centres at Chennai. The company also has a 50 : 50 JV in China for manufacturing Sterile Cephalosporin.

· The company has been in news due to its steep share price fall, due to liquidation by the promoters and their financiers. This resulted in the share price falling to a low of Rs.107 against its 52 week high of Rs.328.

· The financial performance of the company has been quite robust for FY 07. On a standalone basis, its total income was at Rs.936 crores with EBITDA of Rs.291 crores, resulting into a margin of 31-10%. PBT was placed at Rs.111 crores, while PAT at Rs.96.63 crores, resulting into an EPS of Rs.14.70, on equity of Rs.65.82 crores.

· On consolidated basis, for FY 07, total income was at Rs.985 crores with PAT of Rs.78.60 crores resulting in an EPS of Rs.11.95.

· For 9 months ending 31-12-07 the total income of the company was at Rs.919 crores with EBITDA of Rs.344 crores, resulting in a margin of 37.44%. This shows a robust 6% plus growth over FY 07. PBT was at Rs.222 crores with PAT at Rs.169 crores, giving an EPS of Rs.25.70 for the period.

· On consolidated basis, 9 months ending 31-12-07, PAT was at Rs.159 crores, giving an EPS of Rs.24.15 for the period.

· 9 months ending 31-12-07, had an exceptional gain of Rs.79.04 crores, being gain on outstanding FCCB. A tax provision of Rs.30.75 crores made on this gain, thus having a net effect of Rs.48.29. crores.

· The company issued FCCB of US $ 175 million in February 07 for a tenure of 5 years with an option to convert them at Rs.348.335 per share. Issue expenses and premium to be paid in the event FCCB are not converted of Rs.363.71 crores, were adjusted against general reserves of the company in FY 07. Apart from this, the company has a debt of Rs.700 crores having an annual interest burden of Rs.75 crores.

· FY 08, may have a topline of Rs.1,200 crores with PAT of Rs.160 crores, from core business which results in an EPS of Rs.24 plus.

· For FY 09, the topline of the company is likely to be over Rs.1,500 crores, with PAT of Rs.200 crores, giving an EPS of Rs.30 plus.

· The recent liquidation, by the lenders to the promoters against their stock, has brought down the share price to very attractive level of Rs.142 which discounts FY 08 earning by about 6 times and by less than 5 times for FY 09 earnings.

· China JV would also start contributing to the consolidated results of the company. Fresh US FDA approvals for various drugs would also help the company in marketing its products in regulated market, which is very lucrative market and presently contributes to company’s topline by 50%.

· Recent fall is a one time affair, which is not due to any adverse changes in the basic fundamentals or working of the company. So, this should be used as an opportunity to buy the stock.

· Share at Rs.142 qualifies as an excellent bet which has potential to rise to Rs.200 levels in the next 6 – 8 months with virtually no downside risk. Go for it, this is a safe prescription at Rs.142.

Value Buy - SAIL

Steel Authority of India Ltd. (SAIL) is a PSU, fully integrated iron & steel maker, producing both basic and special steels for construction, engineering, power, railway, automotive and defence industries.

· SAIL has 5 integrated steel plants at Bhilai, Bokaro, Durgapur, Rourkela and IISCO while 3 special steel plants are located in Karnataka, Tamil Nadu and West Bengal with 653 dealers in 527 districts spread all over the country.

· The company has joint venture power projects with NTPC as 50 : 50 JV for 314 MW captive power plants at Rourkela, Durapur and Bhilai while 50 : 50 JV with Damodar Valley for 302 MW power project and 1,880 tonne per hour steam generation at Bokaro.

· To improve its self sufficiency, SAIL has entered into a 50 : 50 coal mining JV with Tata Steel to explore 4 coal blocks in India as also a JV with Manganese Ore India Ltd. for 31,000 TPA of Ferro Manganese and 70,000 TPA of Silico Manganese to be available by 2010 for producing 24 million MT of steel.

· During FY 07, the company produced 12.26 million tonne of steel by operating at 114% capacity of which 3 million tonne was value added and special steels.

· For FY 07 the total income of the company was at Rs.35,865 crores with EBITDA of Rs.10,966 crores, resulting into a margin of 30.58% with PBT of Rs.9,422 crores and PAT of Rs.6,202 crores, resulting in an EPS of Rs.15.

· For 9 months ending 31-12-07 the total income was at Rs.27,662 crores with EBITDA of Rs.8,921 crores resulting into margin of 32.25% with PBT of Rs.7,804 crores and PAT of Rs.5.160 crores, giving an EPS of Rs.12.50 for the period.

· For FY 08, EPS of the company is likely to be Rs.18 while for FY 09 the same would be close to Rs.24 in view of better realizations and strong growth expected in the steel consumption.

· The company is planning to have production of 24 million tones of steel by 2010, for which capex of Rs.40,000 crores is planned.

· The debt equity ratio of the company as at 30-06-07 was at 0.18 : 1. The net worth of the company as at 31-03-08 would be Rs.23,000 crores and hence the debt equity ratio of the company is not likely to exceed 0.60 : 1, which is considered very healthy for such a huge steel company.

· SAIL presently has five iron ore mines which provides about 14 million tones of raw-materials to meet almost the total iron ore and about 30% of its flux (limestone and dolomite) requirement of the eastern sector steel plants. About 12 – 13 mt of coking coal is sourced from outside sources. Hence, rising cost of iron ore is not affecting its profitability, though rising cost of coal is a concern.

· Of the present equity of Rs.4,130 crores, Government holds 85.82%; Banks, Mutual Funds, FIIs and Insurance Companies hold 11.75% while only 2.43% is being held by public. This is leaving very low floating stock.

· The present market capitalization of the company is close to Rs.80,000 crores at current market price of Rs.190 per share. The present debt of the company at Rs.2,500 crores makes company virtually debt free, net off, net current asets.

· The steel prices for flat and long products have been increased by about 8% in last fortnight and rose by about 22% since January 08. Still after this rise, the product is in short supply with good offtake. This is bound to improve the working of the company for March 08 quarter.

· Share is presently ruling at Rs.190, which discounts its FY 09 EPS by about 8 times. The steel sector is likely to remain attractive at the current levels, as all the stocks have corrected by about 30% to 35% in the last couple of months.

· Share at Rs.190 makes it an excellent buy with potential to rise by about 50% in the next 12 months.

Value Buy - GMDC

A mine Wealth of Profit

· Gujarat Mineral Development Corporation Ltd. (GMDC) is a Gujarat State government undertaking engaged in the business of lignite, bauxite and fluorspar mining as also power generation units based on Lignite.

· The company has been posting improved financial performance quarter on quarter of FY 08. For FY 07, the total income was at Rs.610 crores with EBITDA of Rs.310 crores, PBT of Rs.157 crores and PAT of Rs.105 crores, resulting in an EPS of Rs.6.60 (face value Rs.2).

· For 9 months ending 31-12-07, the total income of the company was Rs.700 crores with EBITDA of Rs.419 crores, PBT of Rs.270 crores and PAT of Rs.200 crores, giving an EPS of Rs.12.60 for 9 month. Hence, FY 08, is likely to have topline in excess of Rs.1,000 crores with PAT of close to Rs.300 crores, giving an EPS of close to Rs.19 on face value of Rs.2 per share.

· The present equity of the company is Rs.31.80 crores with face value of Rs.2 per share. The board of the company proposed 1 : 1 bonus shares in last week of January 08 and share is presently ruling at Rs.308 cum bonus.

· This translates into a market capitalization of close to Rs.5,000 crores for the company, which is quite low compared to rich reserves of lignite held at its various mines. Even total borrowing of less than Rs.800 crores is largely for net current assets which makes it virtually a debt free company.

· The shareholding pattern of the company as at 31-12-07 is 74% with the promoters being the Govt. of Gujarat, 12% by Mutual Funds, Banks and Financial Institutions and 14% by Public with about 47,000 shareholders.

· The company presently producing about 80 lakh MT of lignite at its three mines. New mines have been developed at the various locations at Surat to cater to South Gujarat where estimated annual production would be 10 lakh MT. 10 lakh MT of lignite production at Amod near Bharuch would fully contribute in FY 09. 30 lakh tonne of lignite production is estimated from Bhavnagar mines to cater to Saurashtra region and Central Gujarat. So, in FY 09, the production of lignite shall get increased by about 40%.

· The company also has 250 MW power plant in operation based on lignite.

· Lignite referred to as Brown Gold, is an alternative for coal which is in great demand, as natural resources are becoming scarce all over the world.

· FY 09 the company may see a topline of Rs.1,500 with PAT of Rs.600 crores which would result in an EPS of Rs.38, on pre-bonus equity. This results into a PE multiple of just 8 times for the stock, which is very cheap for any mining company.

· The share which is now ruling at Rs.308, would go ex-bonus by the end of April at Rs.155. The stock at this rate is quite cheap, which can give a conservative return of close to 50% per annum over the next two years.

· A safe and excellent bet at Rs.308 levels on cum-bonus basis.

Value Buy - INDIA GLYCOLS

* India Glycols is the first and only company in the world to produce Ethylene Oxide (EO) / Mono Ethylene Glycol (MEG) from renewable agro route based on molasses, which is a by-product of the sugar industry.

* MEG is used in the manufacture of polyester resins, films fibres, and is an important raw material used in the production of coolants, antifreezers, aircraft ant-icers and solvents. Thus the client base of India Glycols covers almost entire India Inc, supplying MEG to more than 1,000 customers in various end-use industries such as Textile, Agrochemical, Oil & Gas, Personal Care, Pharmaceuticals, Brake Fluids, Detergent, Emulsion Polymerisation & paints etc.

* Making MEG from ethanol is highly cost effective as against using crude, which is currently ruling at record high prices. Using crude is uneconomical and world over, companies are shifting to use of such renewable agro routes. Currently the price of ethanol has been fixed at Rs.21.50 per litre for the next three years (which is less than a dollar) and this is in no way even comparable to the over $100 per barrel of crude. So in this context, India Glycols, having the largest plant in India for making MEG from ethanol has a great advantage.

* The company is now in the midst of enhancing its MEG capacity by 20% at an investment of Rs.25 crore resulting in a very attractive payback.

* During the quarter, the company acquired a controlling stake in Shakumbari Sugar & Allied Industries at a consolidated price of Rs.47 crore, which has a crushing capacity of 3200 Tonnes Per Day(TCD) along with a modern distillery of 40 kilo litres per day(KLPD). With this acquisition, the company would be vertically integrated to captively produce additional ethanol requirements.

* The company has also established its subsidiary in Singapore to augment its activities in South Eastern Asian region and other related areas. It is already exporting to South East Asia, Middle East, Europe, Australia and USA.

* Apart from this, the company has also got into purifying Carbon Di-oxide (CO2), a by-product produced in the distillery, both at its Kashipur and Gorakhpur units which has application in food, beverage and other industrial usage. CO2 plants at both distilleries are to be commissioned in March 2008.

* Indian Glycols has had a super third quarter ending. For Q3 ended 31st December 2007, the company, on a QoQ basis reported a 26% jump in net sales at Rs.449.98 crore, which on a YoY was up by 93%.

* EBIDTA was up in Q3, on a Q0Q by 29% at Rs.113.53 crore which YoY was up by a whopping 219%. OPM improved from 15.27% in Q3 FY07 to 24.52% in Q2 FY08 and now in current Q3, it was at 25.23%.

* The best probably jump has been in its net profit. For the current Q3 it was at Rs.67.50 crore, which on a QoQ indicated a jump of 40% but YoY, it has gone by an unbelievable over 6 times. NPM rose from a meager 4% in Q3 FY07 to 13.56% in Q2 FY08 and now in Q3 FY08 it stands at a healthy 15%.

* On an equity of Rs.27.88 crore, the company, for Q3 FY08 posted an EPS of Rs.24.21. What this means is that the company will end this fiscal with an EPS of Rs.80, that’s a certainty. Also based on the present earnings, one can safely say that for FY09, the company will have an EPS of Rs.100, what with the additional capacity also expected to go on stream.

* The cash EPS for Q3 was at Rs.31 and this means that we are looking at a certain cash EPS of around Rs.100 in FY08 and Rs.120 in FY09.

* For a nine months ending 31st December 2007, though the company had forex gains of Rs.21.80 crore, the same would get added on in FY09 through improved performance and hence an EPS of Rs.100 for FY09 can be reasonably expected.

* The stock is currently quoted at Rs.247, giving us a PE of just 3 on the EPS of Rs.80 estimated for this fiscal and if we look at the expected EPS of Rs.100 in FY09, the PE works to a measly 2.50 times. Now if that isn’t good enough, nothing else will be!

* What makes India Glycol a great buy is the fact it has a unique business model which enables the company to produce petrochemicals and specialty chemicals from renewable agro route base and that too where the cost of the raw material is fixed and is available in abundant supply. Coupled with growing demand and higher margins through larger volumes, there is no way that this winner of a company can falter. The icing on the cake is that currently, looking at the future discounting, the company is quoted at a dirt-cheap price.

* One can safely buy India Glycols at the current rate of Rs.247 for a sure 50% return over the next 12 months.

Value Pick - NTPC

A power packed stock

The present state of the market has brought the blue chips at much below their intrinsic worth, with many having corrected by about 30% from their recent highs. Under the present circumstances, it is thus best to pick up stocks which today offer greater value for money. National Thermal Power Corporation (NTPC) is one such stock.

* This power generating PSU currently has a power generation capacity of 27,904 MW. Of this, the company owns 26,850 MW. Of this 26,50 MW, 22,895 MW is coal based with 15 projects while 3,955MW is gas based with 7 projects. 1054 MW is under JV of which 314 MW is coal based and 740MW is gas based.

· The paid up equity of the company is at Rs.8,245 crore being 824.55 crore equity shares of Rs.10 each. Of this, the Government of India holds 89.5%, 7.55% by mutual funds, banks and insurance companies while public holds 2.95% as at 31/12/07. Such a massive power generation company with a paid up equity of just Rs.8,245 crore is beyond imagination!

· NTPC is implementing 11 projects for 10,860 MW in various states, which would take the capacity of the company to close to 40,000 MW. All these projects would be operational in next 36-42 months. The total cost of these projects is Rs.40,000 crore and are located in UP, Bihar, Assam and Maharashtra.

· NTPC has also entered into a Joint Venture with BHEL, a 50:50 JV to carry on EPC activities, including manufacturing and supply of equipments and power plants for third party power generating companies.

· For FY07, the total income of the company was at Rs.35.380 crore, with an EBIDTA of Rs.12,842 crore, giving a margin of 36.3%. PBT was at Rs.8,907 crore while PAT was at Rs.6,865 crore, giving an EPS of Rs.8.33.

· For the nine months ended 31/12/07, the total income of the company was at Rs.28,531 crore, with an EBIDTA of Rs.10,626 crore, resulting in a margin of 37.25%. This is an increase in the EBIDTA margin by 95 bps in 07-08. PBT was at Rs.8,103 crore while PAT was at Rs.6,076 crore. This gives an EPS of Rs.7.37 for the period. This implies that FY08 EPS would exceed Rs.10.

· Net worth of the company as at 31/12/07 is at Rs.55,300 crore, resulting in a book value of Rs.67. The debt of the company is less than Rs.20,000 crore, net off cash balance resulting in a debt equity ratio of just 0.35:1. Presently, all other power generation projects are going for a debt equity of 70:30.

· With huge thrust in the 11th Plan on power generating capacity of 70,000MW, the company would cross power generating capacity of 50,000 MW by the end of the 11th Plan period, viz: 2012.

· Instead of going for Ultra Mega Power Projects, the company is implementing projects of 1,000MW to 2,000 MW which can get completed in 3 years, in phases. Some of these projects are 1980 MW (660 MW ´3) in Bihar with Capex of Rs.7,341 crore; 750 MW (250 ´3) with outlay of Rs.4,375 crore in Assam; 1000MW (500 MW ´2) with outlay of Rs.5,459 crore in Maharashtra and 1320 MW (660MW ´ 2) in Allahabad. This puts the projects on a fast track thus minimizing the execution risks and cost overruns.

· Once Nuclear Power project takes off, NTPC would be a giant player in the field to increase its power generating capacity.

· For FY09, the EPS of the company would be placed close to Rs.12.50 which discounts current share price of Rs.190 by about 15 times. All other power generating companies are ruling at a PE multiple of 20 to 35 times, despite none of them having even a 10% power generating capacity of NTPC.

· Share at Rs.190 is a safe and excellent bet, which can give a consistent return of 24% over the next 3-4 years in share price. Go for this power packed stock!

Value Buy - Kernex Microsystems

· Kernex Microsystems is engaged into manufacturing of Networked Anti-Collision Devices (ACD) for Indian Railways and had installed over 2,500 kms. in Indian Railways since 04 – 05.

· These ACDs are supplied by the company to Railways, through Konkan Railways, under its exclusive Technology and Production Tie-up.

· Railways Board, after review of ACD Pilot Project in North Frontier Railways, set by the company, declared it to be completed, commissioned and proved to be successful. According to Railway Safety Plan, ACD Systems will be deployed in the entire Indian Railway Network by 2013 and survey over 10,000 kms is in progress.

· Railway Minister Lalu Prasad Yadav has cleared deploying thee ACDs under Railway Safety Plan, in its 08 – 09 budget. This was pending for quite a long time, which finally saw light of the day.

· The total outlay by Railways on these ACDs, till 2013 – 14 is estimated to be about Rs.3,500 crores, taking cost escalation and design changes into consideration and for about 56,000 kms., covering all routes of Indian Railways. So, annual flow of orders to the company, could be about Rs.400 crores.

· For FY 07, total income of the company was at Rs.29.68 crores, of which Rs.6.90 crores came via bank interest and provisions written back. Due to this, EPS for the year, was at Rs.5.61. The income of Rs.21.80 crores from its core business is purely of maintenance of ACDs supplied earlier by the company, which is about 15% annually, of cost of equipment.

· Even in first nine months of FY 08, total operational income of about Rs.15 crores is purely from AMC of ACDs supplied by the company to Railways, earlier. Even this activity would give an EPS of about Rs.5 to the company.

· The present paid-up equity of the company is at Rs.12.50 crores, which got raised due to 1 bonus share, issued on every 10 shares held, by the company. Of this, promoters holding is 58% while 42% is held by the public.

· The EBITDA margin of the company on these ACDs are over 40% and costs about 35% to 40% against similar devices, if imported. Also, any supply of ACDs gives an assured AMC of 15%, every year, to the company, on equipments supplied. ACDs supplied by the company in 05 – 06 is enabling the company to earn an AMC revenue of Rs.20 crores, annually, by which EPS of about Rs.5 is being earned.

· Once this supply will start to Railways, the performance of the company, would come in new orbit with EBITDA in excess of Rs.50 crores, depending upon the quantum of order flow from Railways. Even bottomline could be close to Rs.25 crores, giving an EPS of Rs.20 as the company has least interest and depreciation burden.

· The company is also aiming to capture the major segments of medium to light density Rail routes in developing countries, as the ACD system is efficiently suited and cost effective. The company is hopeful of securing ACD orders from countries like Egypt, South Africa, Brazil, Argentina, Venezuela, Indonesia, Cambodia and Vietnam.

· Even continuous upgradation keep happening in ACDs as R&D is the main focus of the company. This would keep demand of improved version products in place, which shall assure continuous and assured business to the company.

· The company also makes Advanced Railway Signal Systems, for which major trust has been given by Railways in its recent budget. This could be another area of growth for the company.

· The company is also developing “Multi Section Digital Axle Counter” in collaboration with Altpro, Zerob, Croatia and Indian Railways has requirement of about Rs.600 crores, in the next five year for this product.

· The company also makes Auto Driving Devices for Metro Railway, which would be developed once Indian Market for the same is developed.

· The company is a debt free company and Rs.99 crores, raised by the company from IPO is still available with the company.

· With expectation of these Railway orders, working of the company would improve sharply from FY 09. Since the sector enjoys a very high PE multiple, share had potential to cross Rs.500 mark in the next 10 – 12 months. Long term prospects are extremely bright.


· Share at Rs.220 is a safe bet which can give a return of 100% in the next 12 months and a consistent return of 40% to 50%, annualized, over the next 2 – 3 years.