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Business News/ Market / Mark-to-market/  Is Orient Paper stock poised for a re-rating?
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Is Orient Paper stock poised for a re-rating?

Orient Paper’s stock gained more than 50% in 2012 on expectations that cement business de-merger will unlock value

Orient Paper will spin off its cement business and give one share of Orient Cement for each stock of Orient Paper held by investors. Photo: Mint (Mint)Premium
Orient Paper will spin off its cement business and give one share of Orient Cement for each stock of Orient Paper held by investors. Photo: Mint
(Mint)

Shares of Orient Paper and Industries Ltd have gained more than 50% in 2012, far outperforming the broader market, on expectations that the cement business de-merger will unlock value and the paper business may see some recovery in the second half of the current fiscal.

Orient Paper will spin off its cement business and give one share of Orient Cement Ltd for each stock of Orient Paper held by investors. The separation is expected in the next three-four months and is likely to lead to a re-rating of the cement segment valuation as it will ensure that cash flows are used to fuel growth in the segment, rather than bail out the money-losing paper business, according to analysts.

The cement division, which contributes around 58% to revenue, may continue to outperform and is expected to post revenue growth of 14%, driven by 9% volume growth, over FY12-FY15, Amit Srivastava from Nirmal Bang Institutional Equities Pvt. Ltd said in a note dated 25 December. Operating margin is expected to widen by 600 basis points (bps) to 26.8% by FY15, buoyed by higher coal consumption through linkages and improvement in capacity utilization. One basis point is 0.01 percentage point.

In the September quarter, the cement segment posted 22% growth in net sales to 355 crore and net profit grew 5% to 59 crore year-on-year. Volume was up 20%, but realizations were flat because of rising power and fuel costs, higher proportion of coal imports and a price correction in Andhra Pradesh. As a result, Ebit (earnings before interest and tax) margin narrowed 273 bps to 16.6% from a year ago.

Brokerage firm Nirmal Bang expects overall net sales to grow at 15.1% in FY14, from 13.7% in FY13 and operating margin to expand to 15.2% next fiscal from 14% in FY13 buoyed by the likely re-rating of the cement division, a turnaround in the paper segment and robust growth in the electrical segment. Orient Paper’s shares have seen a decent run-up year-to-date and are trading at a one-year forward price-to-earnings multiple of around 7.

The cement de-merger and recovery in the paper segment hold the key for further gains.

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Published: 02 Jan 2013, 06:45 PM IST
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