Slowdown in Q3 due to raw material shortage: Orient

In an interview to CNBC-TV18, ML Pachisia, managing director, Orient Papers & Industries spoke about the company's Q3 performance.

Pachisia says water and sand shortage in its cement markets, specifically Maharashtra and Andhra Pradesh are the main reason for the poor numbers in its construction business. The company's Q3 net profit was down at Rs 14.6 crore versus Rs 42.4 crore, year-on-year.
On its paper business, Pachisia says the huge increase in paper's raw material cost has added to the shortage in growth. "Bamboo and wood prices have gone through the roof and so, there is a shortage of growth there," he adds.

Below is the edited transcript of Pachisia's interview to CNBC-TV18. Q: Your profitability is the one which actually was the most disappointing with the fall of around 65 percent on a year-on-year basis. What happened with regards to the earnings before interest, tax, depreciation, and amortisation (EBITDA) level? How much of an operational pressure did you see? Do you see a recovery going forward?
A: Firstly let’s look at the various businesses of the company. The cement business saw fall in prices in realisations during this quarter. There was a slowdown in the prices due to a shortage of sand and water in Maharashtra and Andhra Pradesh. There was also a slowdown in construction activities that resulted in slowdown in cement demand and reduction prices.
That basically is the reason. We didn't see any great cost pressure increasing over the previous quarter. However, towards the end of January, we have seen some revival on the prices in Maharashtra in particular. So, we can maybe look forward to a better Q4.
As far as paper is concerned, it has been a drag on the company because of the power plant problems. Fortunately, we were able to commission our power plant and the power plant is now reasonably stabilised. We are seeing the result of that in terms of steady production.
The other big problem with the paper business last quarter was the huge increase in raw material prices that is bamboo and wood. Those prices have gone through the roof and so there is a shortage of growth there.
The electrical division has done reasonably well. There is no issue there. Q: How will these costs pan out in the current quarter as well as the Q1 of next year. Are you noticing any easing of raw material pressures? Will your fuel cost go up further with these bulk diesel purchases prices going higher? Are you a bulk diesel purchaser?
A: We are not bulk diesel purchasers. Basically, we don’t see any easing up on the raw material cost side in the short-term. We have been able to procure something from the Madhya Pradesh government at a much lower price and paper prices too have started moving up.
Last quarter there was no movement in the paper prices. So, there is a small recovery. I don’t think that we can recover full cost increase through price increase. However, there is a small recovery in terms of realization. That coupled with the fact that our production and operations would resume normal efficiencies and normal levels of production, we think paper will do better, although it will continue to be under pressure. Q: When your cement business gets demerged your paper division could have a problem because it still performs better than your paper division?
A: Yes, ofcourse the cement business will get demerged hopefully soon. The business will be under some pressure. The paper business for Orient has not been a drag all these years expect for the last couple of years. So, there would be some pressure certainly, but we believe that another six months time things will settle down. Q: When does the demerger take effect? How long will it take?
A: Demerger is going to be effective from April 1, 2012. We are waiting for the final approval from the courts to the scheme that has been approved. Actually, the courts have approved the scheme, but because there was a delay in the court’s giving us the corrected judgement. So, we now have to apply for a condonation of delay in filing. That is what is pending before the courts. Any day when the hearing takes place, that should get approved and as and when that is approved, we will complete the filing formalities and then it becomes effective from 1st April 2012. Q: We should give it what three months or less then?
A: It should be less. Q: What is the guidance on the paper front going forward?
A: The demand has been growing at a normal rate. The advantage we have is that a substantial part of our business is tissue paper and 60 percent of tissue paper that we produce is being exported all over the world. That gives us a better realisation than the normal writing printing paper. So, tissue paper should do much better. Q: There are some estimates that you could finish up FY13 on a consolidated level on the revenue front at around Rs 2,600 crore and the EBITDA at around Rs 365 crore. Would that be a fair assumption in terms of your revenues as well as your EBITDA for the year?
A: I would not like to make any number predictions as of this stage because the markets are volatile. It will also depend upon how cement pans out and how quickly we are able to stabilise the paper plant operations. So, it is difficult at this stage to give any specific numbers.