Orient Paper

Trading at six times its trailing 12-month FY09 earnings, the stock of Orient Paper and Industries (Rs 54) appears to be a value buy. All three of the company’s key business segments — cement, paper and consumer electronics — appear poised to deliver reasonable growth. OPIL is on an expansion spree, invading the smaller semi-urban markets by spreading out its dealer network. With efforts to increase market share and improve operating efficiency, the company can tide over the current challenging situation.
Background

Orient Paper & Industries though began its business only as a paper manufacturer with a single machine in 1939, it now operates diversified businesses. About 60-65 per cent of the company’s revenues come from the cement business with paper and electrical goods chipping in with the rest. The company’s cement units cater to the markets in Andhra Pradesh and Maharashtra. In FY-09, the OPIL’s cement division reported a 20 per cent growth in net sales against the industry’s average 8 per cent; the company’s fan sales in the domestic market rose 10.6 per cent against the industry average of 4 per cent.
Cement’s share

OPIL’s cement capacity is now at 3.4 million tonnes (mtpa). This is set to increase to 5 mtpa as the new kiln at Devapur, Andhra Pradesh, commences operation . . Though the demand scenario in the southern markets has been dull in recent months, the company has been taking initiatives to expand its reach, which have been paying off.

In FY09, the company established 17 new depots — and added 330 stockists to its network, aiding a 22 per cent volume growth in Andhra Pradesh and Maharashtra.

With the commissioning of new capacity, the company is planning a further enhancement of dealer network and intensified brand promotion. The proposed cement capacities in the South, which have weighed on the utilisation rate of plants, however, remain a concern.

The recent June quarter numbers, which saw a 7 per cent volume dip, were impacted by the shutdown of the company’s kilns on up-gradation work.
Paper, welcome choice

In 2008-09, OPIL managed sales growth on higher realisations despite a 14 per cent decline in production on temporary shutdown of the mill. Branded retail stationery has been a fast growing market and the company entered this market last year with the launch of notebooks under the brand, ‘1st choice’.

OPIL’s new tissue plant of 15,000 tonnes capacity is also set to commence production this year and may aid realisations and margins in the paper business. The company is striving to improve the sales further by setting up a network for selling the new branded notebook and tissue products to institutional segments.

Initiatives like these may be crucial to sales as, similar to the case of cement, the paper industry too is marred by fears of a capacity overhang. 6.5 lakh tonnes of new capacity are expected to be added in the next one-and-a-half years.

This would leave a surplus of 4.5 lakh tonnes in the market as the industry is expected to grow at 5-6 per cent. The domestic market now absorbs 30 lakh tonnes of paper a year.
Electricals add strength

OPIL’s electrical division, which includes fans, compact fluorescent lamps and other lighting, reported a 53 per cent growth in operating profits in 2008-09 following a close to 20 per cent growth in sales.

The company is also the country’s largest exporter of fans. But following the slowdown in export demand during the year, the company increased its focus in the domestic (semi-urban) market.

OPIL’s fan sales in the domestic market rose by 11 per cent in FY-09.

The company is further looking to expand its distribution reach in Tier-II and Tier-III markets. Strong trends in semi-urban and rural sales have been key drivers in this business.

The company has been taking up several proposals to improve its cost efficiency — setting up heat recovery units to lower energy consumption, upgrading existing evaporators and boilers at its paper mills, reducing power and coal consumption in the cement kilns.
Cost efficiencies

The company is also commissioning a 50 MW captive power plant for powering its cement units (a 43 MW power plant for the paper mill is also being planned) and has completely automated cement packing plants.

OPIL’s sales have grown at a compounded annual rate of 17 per cent in the last three years. Penetration into new markets in the domestic region and higher realisations from the paper and cement segments have buttressed the growth.

The company’s operating profit margin stands at the industry’s average 24-27 per cent.

Financing the above capex should not also be a problem for the company as its debt-to-equity stands at a low 0.35. OPIL promises to deliver growth in the medium-to-long term.