Investors can consider investing in Orient Paper

22 Feb 2010, 0331 hrs IST, Amriteshwar Mathur, ET Bureau

Orient Paper & Industries, a part of the GP & CK Birla Group, is a diversified player in products, such as cement (contributed 58% of the total segment sales in the current financial year), coupled with electric fans, paper and paperboard.

The company’s key market for cement includes Andhra Pradesh and Maharashtra, and while it was adversely affected in the third quarter of FY10 by weak realisations, the operating environment for this division has shown signs of improvements over the past few weeks.

For instance, cement prices in Hyderabad have shown an uptick with prices currently at Rs 155 per bag levels, as compared to Rs 130 per bag in November 2009.

In addition, a revival in the residential construction sector should help improve demand for Orient’s products, such as electric fans, going forward. The stock currently trades at discount to other South-based diversified cement conglomerates.

CAPACITIES & EXPANSION PLANS: The company’s cement capacity was 3.4 million tonne at the end of March 2009, a rise of nearly 41.7% from two years earlier.

In addition, the company’s new kiln at Jalgaon, Maharashtra, had started commercial production in the third quarter of FY10, and Orient will also shortly bring on stream an additional 1 MT unit at Devapur, Andhra Pradesh. This would raise the company’s cement capacity to 5 MT.

Its other product segments include electrical consumer durables like electric fans, where it is one of the leading players in the organised sector, with a capacity of 3.5 million units at the end of March 2009, a rise of 35.7% from two years earlier. In addition, its paper and paperboard capacity was 171,000 tonne at the end of March 2009, unchanged for the past two years.

The company had invested nearly Rs 762 crore during March 2007- March 09 period, while its cash flow from operations during this period was Rs 768.8 crore.

FINANCIALS: Orient Paper’s operating profit margin declined 630 basis points y-o-y to 18.8 % in the third quarter of FY10, at a time when its net sales rose 2.6% to Rs 372.2 crore.

Pressure on its operating profit margins was due to its key cement division, where realisations declined nearly 8 % y-o-y to Rs 2,713.8 per tonne, while its despatches grew almost 5% yoy to 0.78 MT in the third quarter. Orient Paper, along with other players operating in the southern region, has been grappling with additional capacities coming on stream in this region over the past few months, coupled with signs of a slowdown in implementation of government-funded projects in Andhra Pradesh in the third quarter of FY10.

However, cement prices have shown signs of bouncing back over the past few weeks, In Orient Paper’s other divisions, such as electrical consumer durables, which include electric fans, the company benefited from a broad revival in demand, especially from the residential sector. As a result, segment profit of this division improved 168 % yoy to Rs 6.6 crore in the December 2009 quarter.

VALUATIONS : Orient Paper & Industries at Rs 47.6 per share, trades at nearly 5.8 times on a trailing four-quarter basis. Other diversified cement players in the South, such as India Cements, trade at 8.3 times, while Madras Cements trades at 6.7 times. Investors could consider investing in Orient Paper in a bid to take advantage of the long-term growth opportunities in the company’s various product segments.

Via:E.T