Buy Orient Paper; target of Rs 80: Emkay

Emkay Global Financial Services is bullish on Orient Paper and has recommended buy rating on the stock with a target of Rs 80 in its August 3, 2012 research report.

“OPIL’s 1QFY13 adj EBITDA for the quarter at Rs987 mn (-2.5% yoy), was below estimates of Rs1188mn led by poor performance of cement and electricals division. Though 9% yoy improvement in cement realizations (Rs3868/t) and 13% yoy growth in volumes helped cement revenue growth of 23% higher costs resulted in 6.5% decline in cement EBIT (Rs1.02bn vs est of Rs1.13bn). During the quarter OPIL received lower linkage based coal from SCCL, leading to OPIL procuring significantly high cost imported coal from South Africa( proportion of imported coal increased from 10% to ~20%). Further the recent increase in coal royalty (increased to 14% advalorem as compared 5%+Rs55-180/mt) led to higher coal P&F costs at Rs904/t which increased 24% yoy and 26% qoq. Similarly freight costs (Rs770/t) increased 14% (Led by rail freight hike of ~23% taken in March 2012). Other expenses at Rs517mn increased 54% yoy and 13% qoq. Hence total costs increased 19% yoy to Rs2735/t which resulted in lower than estimated EBITDA/t of Rs1134 (vs est of Rs1272) decline of 10% yoy and 8% qoq.”

“Revenues from electricals division of Rs1.84bn, +18.3% yoy, came in line with est as OPIL clocked volume growth of 9% in fans division vs 5% for the industry. However EBIT surprised us negatively (EBIT at Rs67 mn vs est of Rs133mn) with EBIT margins contracting 420bps yoy to 3.7% (vs est of 7%).EBIT margins were impacted on account of increase in establishment and distribution expenses (distribution network increased in 20 new cities taking total number of cities to 68) incurred on new products. Paper division continued to disappoint with loss of Rs159mn (Loss of Rs147mn from Amlai plant). However on account of higher other income (Rs153mn vs est of Rs80 mn ) and lower depreciation and interest expenses APAT at Rs599mn were just slightly below estimates of Rs620mn. Consequently reported net profit stood at Rs489mn,-17.7% yoy.”

“De-merger of cement business approved by high court. Triggers much awaited value unlocking process. Stock trades at undemanding valuation of 5.6x FY13 PER & EV/E of 4X. BUY - target price Rs80,” says Emkay Global Financial Services research report.

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