Orient Paper & Industries (NSE Code ORIENTPPR) - 11th Jan'12 Risk Arbitrage from Katalyst Wealth

Orient Paper & Industries Ltd - (NSE Code – ORIENTPPR)Demerger – An Arbitrage opportunity

Orient Paper & Industries Ltd - (NSE Code – ORIENTPPR)Demerger – An Arbitrage opportunity

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Risk Arbitrage/Special Situation – Alpha Plus Portfolio recommendation for the month of Jan’12

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


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 & IndustriesWe would like to bring to your notice an interesting arbitrage opportunity in the case of Orient Paper & IndustriesLtd (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 todemerge the Cement Undertaking of the company to a newly incorporated wholly owned subsidiary of theCompany, 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 theshareholders of Orient Paper & Industries (OPIL) for each equity share they hold in OPIL as of the record date, i.e. ademerger ratio of 1:1.


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 participatedirectly 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 BombayStock Exchange. The company will issue fresh shares of Orient Cement to shareholders of OPIL and therefore OrientCement will have a mirror shareholding as in OPIL.


1:1 de-merger – Transactional structure


Business units of OPIL


Market cap – 5 times CFOThe current market capof the company isapproximately 950-1000 crores, howeverOPIL has consistentlybeen generating Rs 200crore cash fromoperations (ondeducting interest).

The same has enabledthe company to start


the company to startwith 60% expansion incement productioncapacity, set up 55 MWpower plant at PaperMill while maintaining ahealthy debt to equityratio of 0.5.

At 4.5-5 times CFO, thecurrent valuations leaveenough room for valueunlocking.

Cement unit – The demerging business overview


As can be observed above, OPILs Cement unit has been performing extremely well and has consistently recordedEBITDA 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 inexcess 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 profitof 180-200 crore in the Cement unit. At a nominal PE of 5-6, the market cap of cement unit alone should bearound Rs 1000-1200 crore, while the current market cap of the entire company is Rs 972 crores.

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 brandpull and vast dealer network (more than 5000 dealers), the company recently diversified into small electricalappliances.

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 standardsand considering the strong pull for the brand , such companies trade at a PE of 10, thus Electricals unit on astandalone basis can command a market cap of 300 crore.

Paper unit – Business overview


OPIL has the largest Tissue paper capacity and the total Paper capacity at 100,000 tons per year, however for thelast 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 hasalready started with the corrective measures by investing in creation of 2 large water reservoirs with a capacity of250 million gallons. Besides, company is in advanced stages of setting up a 55 MW power plant which will improvethe 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 thereplacement cost of a 1 lakh ton Tissue paper plant, 55 MW power plant, 36,000 TPA caustic chlorine plant couldbe more than Rs 500 crores.

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 1500-1700crore, 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 cementplant with a capacity of 3 million TPA, and here we are getting 5 million TPA cement capacity, 50 MW runningpower plant, 55 MW upcoming power plant, 100,000 TPA paper manufacturing facility and the Electricals unit ofthe 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 warrantconvertible 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 stockis offering a dividend yield of 3%, the highest by the standards of comparable cement companies and companiesdealing in Electrical appliances.

The de-merger of Cement unit of the company into Orient Cement can act as a trigger to value unlocking.

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 witnessingbuying interest from the informed and the smart investors. As per our talks with the Company, the approval fromthe 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 therecord 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 entitlementfor the shares of Orient Cement in the ratio of 1:1. In case of OPIL, we expect it to list the shares of Orient Cementby 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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Orient Paper & Industries (NSE Code ORIENTPPR) - 11th Jan'12 Risk Arbitrage from Katalyst Wealth

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Transcript of Orient Paper & Industries (NSE Code ORIENTPPR) - 11th Jan'12 Risk Arbitrage from Katalyst Wealth