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Orient Paper and Industries Limited (Orient Paper), promoted by CK Birla Group, is India’s largest manufacturer and exporter of tissue paper with ~17% domestic market share. Its integrated manufacturing facility is located at Amlai in Madhya Pradesh (MP) having a total installed paper capacity of 100,000 MTPA viz. 50,000 MTPA each of Tissue and Writing & Printing (W&P) Paper. It also has 72,500 MTPA of pulp capacity and a 55 MW captive power plant. It also has 36,000 MTPA capacity of Caustic Soda, contributing ~20% to revenue. Vide a process of sequential demergers, its erstwhile cement and consumer durables businesses are now parts of two separate listed entities.
Stable quarter led by steady realizations
* During Q4FY19, net sales went up by ~9.1% y-o-y at Rs 1,981 mn, driven by firm sales realization and steady volumes. Realization remains stable for both W&P and tissue segment mainly due to stable demand. The Company recently undertook a marginal price hike (earlier price hike taken by the Company was in October, 2018), which has been very well absorbed in the market and the management has indicated no significant price hike would be taken in near future.
* Furthermore, the Company may witness a maintenance shutdown of 10-15 days in Q1FY20E (spread between May & June) which may result in production loss of 3,000- 4,000 MTPA; management expects full capacity utilisation from Q2FY20E onwards. Additionally, pulp prices which made a high of USD 800/tonne last year is now stabilised at USD 680-700/tonne.
Margins expected to improve with better realization & operating efficiencies
* During Q4FY19, EBITDA went up by 7.7% y-o-y to Rs 369.4 mn, while EBITDA margins marginally declined by 24 bps y-o-y to 18.6% on account of higher usage of imported pulp and higher other expenses. Going forward we expect EBIDTA margins to improve to 20.1% on the back of better product mix, higher realizations and optimum utilization of capacity.
Pulp capex will lead to raw material security and an additional tissue capacity
* To eliminate its dependency on the more expensive market pulp (<10% of total pulp requirement at >50% higher cost than own manufacturing), Orient Paper is undergoing an expansion to increase its pulp capacity from 72,500 MTPA to 100,000 MTPA at a cost of Rs 450 mn. The equipment for the same are ordered. It is also setting up a new recovery boiler at a cost of ~Rs 1.65 bn and upgrading its pulp capacity to become ECF (elemental chlorine free) compliant at a cost of ~Rs 150 mn, for which, environmental hearing is completed and final order is awaited. The proposed capex will be commissioned by December 2020 and will be funded majorly through internal accruals and marginal borrowings. Post expansion the enhanced pulp capacity will support paper production of 120,000-125,000 MTPA.
* To augment its enhanced pulp capacity of 100,000 MTPA, surplus power (>15 MW) and huge land bank in M.P, Orient Paper may take up brownfield tissue paper expansion of ~20,000 MTPA as its existing tissue capacity is expected to reach optimum utilization in few years. This expansion can be done at minimal incremental cost and will take approx 1.5 years to get commissioned.
Balance sheet strength bodes well
* Over last few years, Orient Paper has deleveraged its balance sheet by repaying debt of Rs 0.5 bn. As of March 2019, total debt stands at ~Rs 0.2 bn (D/E of 0.02x) against an expected operating cash flow of Rs 1.3-1.5 bn in FY20E, FY21E respectively, providing visibility to meet future capex requirements comfortably.
* Further, Orient Paper holds investments worth ~Rs 2.8 bn in equity shares of Hyderabad Industries Ltd., as a part of the Promoter Group and Century Textiles & Industries Ltd., in which the management intends to liquidate stake going forward. It also holds ~800 acres of land at its erstwhile plant at Brajrajnagar, closed since 1999, which, we believe, will be used for other purposes going forward.
* Orient Paper has moved up the value chain into tissue paper segment, which has higher growth potential and better realizations, leading to a self-sustained model (increasing profitability) backed by favorable demand-supply equilibrium, muted domestic wood prices and healthy balance sheet. However, due to capacity constraints led to subdued volume growth and no visibility of price hike in near future has made us marginally downgrade its earnings estimates for FY20E/21E.
* We have valued the stock on SOTP basis valuing Orient’s core paper business at 6x EV/EBITDA of FY21E and investments (except Brajrajnagar land) at Rs 8/-share. We recommend a BUY on the stock with a target price of Rs 51/- in 15 months, although the long term story looks even better. Any monetization of Brajrajnagar land will trigger an upside potential of profitability and stock price.
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