Though FY2009 witnessed severe slowdown in overall economy, government pump priming in the second half coupled with capacity addition led Orient Ppaper and Industries Ltd (OPIL) post impressive 16% revenue growth on a stand-alone basis.
The operating profit margin (OPM) remained almost unchanged at 26%. However, on account of increase in interest and depreciation charges, growth at adjusted net profit was restricted to 9%.
Cement division was the major contributor to OPIL’s revenues, making for 58% of the total revenues in FY2009. Paper division’s production was affected severely due to a 45-day plant shutdown due to acute water shortage. Moreover, tissue paper industry, where the company is the market leader, could also face pressure on realization on account of overcapacity.
OPIL’s electrical division posted its best performance both in volume and profitability terms in the fiscal. The company achieved volume growth of 11% as against industry growth of 2.5%.
According to the management, cement demand is expected to grow at healthy pace on increased government allocation towards infrastructure development and early signs of revival in real estate sector.
However, stabilization of recently added capacity and additional capacity that is to come onstream will put pressure on realization in H2FY2010.
However, we believe, OPIL will benefit due to its diversified business model and cost saving due to investment in captive power plant. We have slightly fine-tuned our earnings estimates for FY2010 and FY2011 based on updates from FY2009 annual report.
At the current market price of Rs55 the stock trades at price/earnings (PE) of 4.8x, enterprise value (EV)/ earnings before interest, depreciation, tax and amortization (EBIDTA) of 2.9x on FY2011 and EV/tonne of US$31 on expanded capacities of 5MMT. We maintain our BUY recommendation on the stock with price target of Rs67.