Orient Paper & Industries Ltd

Deep discount to fundamentals

Orient Paper & Industries Ltd (OPIL) recently got re-listed post demerger of Cement Business, which is set to be listed later in May-June13. However, valuation of OPIL with the re- CMP Rs7.35 sidual business of Electrical Appliances along with paper has been marred by undue negativism stems from the ailing paper unit at Amlai, MP. Based on limited financial information, NSE Code: ORIENTPPR estimated valuation of the Company leaves lot of up side potential. BSE Code: 502420

04 Apr 2013

Electrical Appliance Business: Expansion underway

Equity Capital: Rs204.87mn

To achieve long term growth, the management has introduced new products like Lighting Face Value: Re 1 Products, Geysers etc. to its extant portfolio comprising mainly of Fans. The Fan Brand Market Capitalization: Rs1.52-bn Orient is endorsed by top sport luminary MS Dhoni. Further, the management has plans to promote the new products to penetrate across breadth of the country. Owing to such promo- 2week Avg Trd. Volume (NSE & BSE) 1.03-mn shares tional activities, the historical profitability (~ at par with Bajaj Electricals, V Guard etc in FY11 ) has taken a hit temporarily, is set to reverse in FY14-15e.

Paper Business: Input bottleneck issues addressed, heading towards turnaround

The paper unit has been incurring loss due to couple of operational issues like water availability during summer and rising energy cost . The management has tried to address the input-side issues by implementing two key projects, 1) a water reservoir to ensure water availability during peak summer and 2) a 55MW Captive Power Unit to reduce operating cost. The plant is undergoing stabilization process, hence, appropriate cost saving is not yet visible. The Amlai unit is expected to be turning around in FY14-15e.

Quoted investments protects downside

The Company, belonging to KK Birla stable, has other investments, mainly in group company HIL (ex- Hyderabad Ind) and Century Textiles (a BK Birla stable firm), besides investments in liquid MFs. The value of all these holdings (all are at decent level, having low downside) is pegged at Rs1104mn after applying 30% discount to the ruling price.

Market ignores the value of idle land at closed Unit-I paper mill at Brajarajnagar
The main attraction of the story remains the 865 acre prime landed property at Brajarajnagar, (proximity to the local railway station) in the industry dominated Jharsuguda District of Western Odisha. The land is vacant since 1999, as the oldest industry of the State, set up in 1936 was closed down by the management due to operational ground. Brajarajnagar is a municipal town, having population of over 100,000 (2001 census: ~77,000) is quite close to Jharsuguda town (~23km). Brajrajnagar has in its vicinity numerous open-cast and under-ground coal mines of Ib Valley Coalfield and Orient Colliery Area belonging to government owned Mahanadi Coalfields Limited, a subsidiary of Coal India Ltd. Prominent industry groups have operations nearby (Vedant Power, Bhushan Steel etc). The area is well connected through railway networks. The current ruling price of land at Brajarajnagar could be pegged at more than Rs10mn /acre. The landed value is expected to be monetized at appropriate time, depending on industrial expansion in the area. Given land aggregation is a tough issue in the present context, disposal of the land parcel to industrial groups/ realty developers could only happen, if at all, with significant premium. As promoters holding the land parcel since preindependence era is in no hurry to dispose the same Since, cash accrual could happen over longer time horizon, 50% discount to NAV is justified for valuation purpose.

Recommendation
First-cut estimation yields immense value primarily emanating from land value and electrical appliance business. The street has expressed too much pessimism over its ailing paper business. The Company has debt of ~Rs1.8-bn (post spin off), as per management sources (~47% of old debt), which can be brought down significantly, should the management liquidate the quoted investments worth ~Rs1.6-bn. The stock holds deep upside potential from the ruling level. However, the investment theme is apt for investors having high-risk appetite with long term investment perspective.

Valuation
Particulars / Rs mn Paper Revenue Paper PBIT EV (based on FY14e Revenue) Electrical Revenue Electrical PBIT Margin EV (based on EBIT) Grand EV Debt (as per magt sources) FY11 2,744 -329 FY12 3,286 -643 FY13e 3,516 -800 FY14e FY15e Multiple 3,797 4,101 -250 5 0.1 9,657 11,298 483 621 5.0% 5.5% 8.0 3,863 4,242 1,813 18.85 20.71 8.85 0.00 11.86 5.33 17.19 Rs mn Per Sh (Rs)

380

1.85

6,164 577 9.4%

7,239 530 7.3%

8,325 375 4.5%

Cash (not known) Mcap before Investment Investment Value at 30% discount* Grand Valuation of Op. assets and Investments Area of Idle Land (Acre) Rate per Acre (Rs mn) Total Land Value Discount to NAV Discounted Land Value Total Fair Value /share (A+B)
MF, all totaling Rs1.56bn as on 4-4-13.

2,430 1,092 3,522

865 10 8,650 50% 4,325 21.11 38.30 42.22

* Quoted Investment constitutes: 1.545 mn shares of Century Textiles, 0.906-mn shares of Hyderabad Industries (now HIL) and liquid

Annexure: Land Sketch of Closed Orient Paper Mills Unit-I, at Brajarajnagar

Source: http://wikimapia.org/#lang=en&lat=21.808596&lon=83.989792&z=13&m=b&permpoly=4544901