Price target: Rs800
Current market price: Rs634

Result highlights

• Backed by healthy realisations in cement and paper divisions, the top line of Orient Paper and Industries grew by a robust 32% year on year (yoy) to Rs302.5 crore.

• On account of higher realisations, the paper division’s margin jumped to 16% against 5% in the previous quarter and a loss in the same quarter of last year. Supported by healthy margins in the cement division, the overall earnings before interest and tax (EBIT) margin expanded by a healthy 1,525 basis points yoy and 280 basis points quarter on quarter (qoq) to 32.5%.

• The other income component for the quarter stood higher at Rs11.4 crore on account of Rs8.67 crore booked towards the realisable value of carbon credits obtained by the company from United Nations Framework Convention on Climate Change (UNFCCC).

• Thanks to the repayment of debt, the interest cost declined to Rs4.6 crore whereas the depreciation provision remained flat yoy at Rs5.6 crore, as the company has not added any asset in the last one year. 

• On the back of the stellar performance of the paper and cement divisions, and a higher other income, the company’s profit after tax (PAT) grew by 155% yoy to Rs58.3 crore, beating our expectations.

• The capital expenditure (capex) programme of the company is progressing well. The company will be able to get an additional cement volume of 0.3 million metric tonne (MMT) for the second half of the current fiscal. It is foraying into manufacture of CFL lamps at a capex of Rs40 crore.

• Taking cognisance of the higher margins in the division and adjusting for the income accruing from the sales of Certified Emission Reductions (CERs), we are upgrading our FY2008 earnings per share (EPS) estimate by 11.5% to Rs112.8 and the FY2009 EPS estimate by 12.8% to Rs113.2.

• The outlook for the company’s business, especially cement and paper businesses, is very positive. Even though the cement cycle is expected to reverse in the next one year, the higher volume growth will partially compensate for the drop in the prices. With the industry scenario looking bright for the next couple of years, we expect the company’s paper margins to remain attractive, providing a cushion to the earnings of the company. The stock is currently trading cheap at 5.1x its FY2008 EPS estimate and 5.6x its FY2009 EPS estimate whereas the cement business is trading at an EV per tonne of USD49 on the FY2009E capacity and USD29 on the FY2010 capacity. In view of the bright prospects for the paper industry and cheap valuations of the company’s cement business, we believe that the stock deserves a re-rating. Hence, we revise our price target to Rs800 per share.