1. Orient Paper & Industries Ltd - (NSE Code – ORIENTPPR)
Demerger – An Arbitrage opportunity
Risk Arbitrage/Special Situation – Alpha Plus Portfolio recommendation for the month of Jan’12
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2. Content Index
• Orient Paper & Industries Ltd (OPIL) :- Slide #3
• The Restructuring Proposal :- Slide #4
• 1:1 demerger – Transactional structure : - Slide #5
• Business units of OPIL : - Slide #6
• Market cap – 5 times CFO :- Slide #7
• Cement Business – The demerging unit overview :- Slide #8
• Electricals unit – Business overview :- Slide #9
• Paper unit – Business overview :- Slide #10
• Demerger – A trigger to value unlocking :- Slide #11
• Investment Strategy :- Slide #12
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3. Orient Paper & Industries Ltd (OPIL)
Dear Alpha Plus members,
We would like to bring to your notice an interesting arbitrage opportunity in the case of Orient Paper & Industries
Ltd (NSE Code: ORIENTPPR, BSE Code: 502420).
Some insights into the Demerger – Arbitrage opportunity in Orient Paper & Industries Ltd
On 27th Ju’11, Orient Paper & Industries Ltd. announced that the Board of Directors of the Company has decided to
demerge the Cement Undertaking of the company to a newly incorporated wholly owned subsidiary of the
Company, namely Orient Cement Ltd, through a scheme of arrangement that will take effect on April 01, 2012,
subject to approvals of the Orissa High Court, shareholders and other regulatory approvals.
In consideration, Orient Cement will issue one equity share of Rs. 1/- each credited as fully paid up to the
shareholders of Orient Paper & Industries (OPIL) for each equity share they hold in OPIL as of the record date, i.e. a
demerger ratio of 1:1.
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4. The Restructuring Proposal
The Board of OPIL approved the demerger of the cement business with the following objectives:
• Creation of a pure-play cement company and to provide existing shareholders an opportunity to participate
directly in the cement business.
• Enable both entities to explore various options to augment their growth plans.
• Sharpen management focus and assign greater accountability for each of the businesses.
• Unlock shareholder value as the demerger allows both companies to find their true value.
Post implementation of the Scheme, Orient Cement will be listed on the National Stock Exchange and the Bombay
Stock Exchange. The company will issue fresh shares of Orient Cement to shareholders of OPIL and therefore Orient
Cement will have a mirror shareholding as in OPIL.
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5. 1:1 de-merger – Transactional structure
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6. Business units of OPIL
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7. Market cap – 5 times CFO
The current market cap
of the company is
approximately 950-
1000 crores, however
OPIL has consistently
been generating Rs 200
crore cash from
operations (on
deducting interest).
The same has enabled
the company to start
with 60% expansion in
cement production
capacity, set up 55 MW
power plant at Paper
Mill while maintaining a
healthy debt to equity
ratio of 0.5.
At 4.5-5 times CFO, the
current valuations leave
enough room for value
unlocking.
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8. Cement unit – The demerging business overview
As can be observed above, OPILs Cement unit has been performing extremely well and has consistently recorded
EBITDA margins in excess of 30% (27.86% for FY 11).
Moreover, OPIL is not heavily indebted as other cement companies, thus enabling it to record net profit margins in
excess of 15% for its Cement unit.
For FY 12 (refer H1 FY 2012 performance in the above illustration), we expect the company to record a net profit
of 180-200 crore in the Cement unit. At a nominal PE of 5-6, the market cap of cement unit alone should be
around Rs 1000-1200 crore, while the current market cap of the entire company is Rs 972 crores.
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9. Electricals unit – Business overview
Orient is one of the leading brands in the Fans (Orient PSPO) and the CFL segment. In order to capitalize on its brand
pull and vast dealer network (more than 5000 dealers), the company recently diversified into small electrical
appliances.
Orient has registered over 30% growth year on year during the last 2 years and has recorded EBITDA margins of 8-
10% on consistent basis, comparable to Bajaj Electricals, the industry leader.
On a standalone basis, the Electricals unit can record a net profit of Rs 30-35 crore. As per the industry standards
and considering the strong pull for the brand , such companies trade at a PE of 10, thus Electricals unit on a
standalone basis can command a market cap of 300 crore.
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10. Paper unit – Business overview
OPIL has the largest Tissue paper capacity and the total Paper capacity at 100,000 tons per year, however for the
last 3 years its been running at sub-optimal capacity due to unprecedented water scarcity during summer months.
The Paper unit of the company has been recording operational losses. In order to arrest the same, the company has
already started with the corrective measures by investing in creation of 2 large water reservoirs with a capacity of
250 million gallons. Besides, company is in advanced stages of setting up a 55 MW power plant which will improve
the cost efficiencies of the paper and the chemical plant (36,000 TPA caustic chlorine plant).
Since the Paper unit is recording losses, we would assign conservative valuations of 200 crores, though the
replacement cost of a 1 lakh ton Tissue paper plant, 55 MW power plant, 36,000 TPA caustic chlorine plant could
be more than Rs 500 crores.
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11. Demerger – A strong trigger to value unlocking
On the basis of Sum of Parts valuation, we believe the market cap of OPIL should be in the range of 1500-1700
crore, while the current market cap of the company is Rs 972 crore.
Consider this, the company has estimated an investment of Rs 1,720 crores for setting up of a Greenfield cement
plant with a capacity of 3 million TPA, and here we are getting 5 million TPA cement capacity, 50 MW running
power plant, 55 MW upcoming power plant, 100,000 TPA paper manufacturing facility and the Electricals unit of
the company for an enterprise value (Market cap + debt – cash and cash equivalents) of 1300 crore.
Moreover, on 7th Mar’11 the company issued 1.20 crore warrants to the Promoter Group, with each warrant
convertible into 1 equity share at a price of Rs 57.25 per share, i.e. a premium of 14.50% to the CMP. Also the stock
is offering a dividend yield of 3%, the highest by the standards of comparable cement companies and companies
dealing in Electrical appliances.
The de-merger of Cement unit of the company into Orient Cement can act as a trigger to value unlocking.
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12. Investment Strategy
The company has received the approvals from the following: Board of Directors, Shareholders, lenders etc.
Now only the High Court approval is pending and once this approval is received the stock should start witnessing
buying interest from the informed and the smart investors. As per our talks with the Company, the approval from
the High Court is expected by late Jan’12 or early Feb’12.
We would suggest the following allocation strategy:
1st Accumulation Range:- 49-52 (4% allocation)
2nd Accumulation Range:- 43-46 (3% allocation)
Note: We will keep you updated on the Profit booking strategy. In case the stock appreciates by 20-30% before the
record date, we will consider complete profit booking.
While if it does not, then we will sell the Orient shares on the ex-date at around Rs 15-20 and retain the entitlement
for the shares of Orient Cement in the ratio of 1:1. In case of OPIL, we expect it to list the shares of Orient Cement
by May’12 as the management seems determined towards unlocking the value of its cement unit at the earliest.
Book complete profits before ex-date Sell OPIL on ex-date and wait for
the listing of new shares
Expected Investment Duration 3 Months 5-6 Months
Expected Absolute Return 20% 30-40%
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13. Katalyst Wealth – Alpha Plus Portfolio
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investors/institutions beat market returns by a wide margin without taking large risks through
in-depth research, analysis and follow up on High Quality businesses and Risk Arbitrage/Special
Opportunities.
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14. Katalyst Wealth
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Email: info@katalystwealth.com
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