Hold Orient Paper; target Rs 80: Emkay

Emkay Global Financial Services has recommended hold rating on Orient Paper & Industries (OPIL) with a target price of Rs 80, in its March 06, 2013 research report.

"Orient Paper & Industries (OPIL) much awaited de-merger of cement business is at penultimate stage with 9th of March being the record date for allotment of shares of Orient Cement Ltd (OCL). On the ex date (7th Mar-13) the stock price will adjust and reflect the value of the Paper & Consumer Durable business (P&C biz). Our assessment of fair value of the P&C biz based on valuation of its comparable paper & consumer durable peers suggest listing range of Rs10-15/share. Management expects this process, culminating in the listing of Orient Cement, to take another 3-4 months.

The de-merger creates a pure play cement company and ensures that the cement cash flows will be dedicatedly used for funding the growth of the business rather than supporting the losses of the paper division. This triggers the much awaited value unlocking process, leading to the re-rating of OPIL’s cement business. However we believe that a significant portion of this re-rating is already in the price as OPIL stock has given ~30% returns despite ~27%/21% EBIDTA/EPS downgrade for FY13E over the last 12 months.

We believe that the stock has already delivered significant return led by re-rating of cement biz as reflected by ~30% run up (in last 12 months) in the despite earnings downgrade. We believe that structurally lower profitability in the cement business (due to slow demand and elevated energy cost structure), low margins in electrical segment and losses in Paper division are unlikely to help any meaningful re-bound in earnings trajectory, leaving little scope for further re-rating & stock out performance. Maintain HOLD with revised target price of Rs 80 (reduced by 5% on account of higher debt)," says Emkay Global Financial Services research report.

Also Read: Orient Paper down 80% on demerger of cement business

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