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Company Background

Orient Paper and Industries Limited (Orient Paper), a part of C K 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 Paper (W&P).

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 ~15% to revenue. Vide a process of sequential demergers, its erstwhile cement and consumer durables businesses are now parts of two separate listed entities.

Investment Rationale

Robust demand resulted in strong volumes and topline growth of ~14.9% y-o-y

* During Q4FY21 Orient Paper’s net sales improved significantly by 14.9% y-o-y and 30.6% q-o-q to Rs.1,545.7 mn, on the back of demand revival, which started in Q3FY21 and continued to gather momentum in Q4FY21, resulting in better volumes and realisation. Sales volume improved by ~10% q-o-q to 22,000 MT while average realisation for the quarter stood at ~50,500/MT against ~48,500 MT in Q3FY21. W&P realisation improved to ~49,000/MT from ~Rs 45,000/MT in Q3FY21 while, tissue realisation remained flat q-o-q at ~Rs 53,000/MT.

* Topline for FY21 declined by ~27% y-o-y to Rs 4,433.6 mn. With educational institutions remaining closed and people adopting safer working environments by working from home resulting in lower office activities, demand for W&P paper remained subdued, impacting the overall performance of the Company during FY21. Further, tissue paper demand was impacted on account of lower demand from export market.

* With COVID-19 Second Wave induced lockdown in many states, the expectation of the start of return to normal business conditions for the Paper Industry during Q1FY22 has been impeded. With ease in lockdown restrictions, the industry is witnessing an improvement in demand from the 3rd week of June 2021. Further, with vaccination drive picking up pace resulting in revival of the economy and gradual opening up of educational institutions, we expect business normalcy from H2FY22E onwards. Tissue paper segment is already doing well in the exports market with realisation far better compared to domestic market. Thus, the worst seems to be over for the paper industry in general and for Orient Paper in particular and we expect gradual improvement in demand and realisation for both W&P and Tissue segment going forward.

* Imports from neighbouring countries have eased out. Additionally, pulp price has now stabilised at ~USD 800/MT from ~USD 450/MT in Q2FY21, making imports further competitive.

* Orient Paper is well positioned for growth in coming years and we have built in a revenue growth of ~26.7% and ~20% for FY22E and FY23E respectively. However, our estimates are contingent upon the future uncertainties of COVID-19 disruptions which might impact our forecasts.

EBITDA margins to stabilize at ~18.5% in FY23E led by better volumes and realisation

* During Q4FY21, EBITDA margins improved by 305 bps y-o-y and 914 bps q-o-q to 3.4% on account of better volumes, realisation and prudent cost cutting measures on key verticals.

* Going forward, we expect EBIDTA margins to stabilize in the vicinity ~18.5% on the back of better volumes and realisation in FY23E led by better paper demand. Further, the Company is undergoing capex, which will result in lower fuel cost (higher availability of steam) and lower raw material cost (eliminate dependency on market pulp), the benefits of which will start accruing from FY23E onwards.

Pulp capex will lead to raw material security and an additional tissue capacity

* To eliminate its dependency on market pulp (15 MW) and huge land bank in M.P, Orient Paper may take up brownfield tissue paper expansion of ~20,000 MTPA at its existing tissue capacity, expected to reach optimum utilization in a few years. This expansion can be done at minimal incremental cost and will take ~1.5 years for commissioning.

* 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 at its existing tissue capacity, expected to reach optimum utilization in a few years. This expansion can be done at minimal incremental cost and will take ~1.5 years for commissioning.

Balance sheet strength bodes well

* As of March 2021, outstanding debt stands at mere ~Rs.820 mn, providing visibility to meet future capex requirements comfortably with marginal borrowings. Further, the Company holds investments worth ~Rs 6 bn in equity shares of Hyderabad Industries Ltd., (a Group company), Century Textiles & Industries Ltd and UltraTech, 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.

VALUATION

Indian paper industry was already impacted by a weakening macroeconomic environment and higher imports from neighbouring countries, which was further aggravated by COVID-19 pandemic. However, Indian Paper industry looks strong in the long term.

With a rise in economic activity and gradual opening up of educational Institutions, the earnings are expected to witness a strong recovery from H2FY22E onwards. We have valued the stock on SOTP basis valuing Orient’s core paper business at 5x EV/EBITDA of FY23E and its investments (excluding Brajrajnagar land and Hyderabad Industries Ltd at 50% discount) at Rs 17/-share and recommend a Buy on the stock with a target price of Rs 41/- in 18 months (34% upside).

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