Buy Orient Paper; target of Rs 91: SKP Securities

SKP Securities is bullish on Orient Paper Industries (OPIL) and has recommended buy rating on the stock with a target price of Rs 91.2 in its December 24, 2012 research report.

"OPIL, part of CK Birla Group, is a diversified company having interest in papers, cement & electrical goods. It has a cement manufacturing capacity of 5 MTPA with 50 MW captive power plant (CPP). Its electrical business consists of fans & lighting products and is the largest exporter of fans from India.

Margin pressure to stable going forward
During H1FY13 EBITDA margins contracted by 491 bps y-o-y on account of purchase of imported coal at higher prices due to shortage of coal in the domestic markets, lower cement realization coupled with higher advertising spend on new product launches.

Going forward, with commissioning of 55 MW CPP at Amlai is likely to improve cost efficiency of the paper division. The plant is expected to save ~INR 300 million annually and is likely to get operational by Q3FY13. Further, better demand environment in western & southern markets to improve cement realization coupled with electrical segment’s margin is also expected to improve in H2FY13 due to seasonal improvement in fan sales.

Capacity expansion plan progressing slowly
The company is implementing a Greenfield expansion of 3 million tonnes per annum (mtpa) cement plant at Gulburga, Karnataka along with 50 MW CPP at a total cost of INR 1.72 billion which earlier was expected to be completed by FY14.

As per current status, the company has acquired ~1,400 acres of land (total ~1,600 acres) at Gulburga and has applied for environmental clearance. Post approval, the plant is expected to get commissioned within 3 years.

De-merge of the cement business on cards
The scheme of arrangement for de-merger of cement business into a new wholly owned subsidiary: Orient Cement Ltd (OCL) has been approved by the Hon’ble Orissa high Court on July 27, 2012. However the certified copy of the order received had certain inaccuracies. Post the receipt of new order from High Court and it’s filing with the Registrar Of Companies (RoC) the de-merger will become effective after which it will take around 3-4 months to get OCL listed on bourses.

Valuation: At CMP of INR 78.5/share, OPIL is trading at P/E of 9.5x and 8.6x of FY13E and FY14E earnings of INR 8.3 and INR 9.1 respectively. We rate a BUY rating on the stock with a 12 months price target price of INR 91.2 at 10.0x FY14E earnings," says SKP Securities research report.

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