Orient Paper & Industries gets NCLT's nod for scheme of demerger
Eralier,Stock had corrected to 85 on 10 August, 2017 and touched life time high 181 on 10 January, 2018.
DEMERGER : ORIENT PAPER AND INDUSTRIES
Demerger – its objectives and structure
In order to harness the full potential of emerging opportunities, the company has decided to demerge our Electric business with effect from 1st March 2017. The principal rationale for the demerger is to
unlock shareholder value.
The primary rationale behind the demerger of the electric business is the nature of risk and competitive dynamics involved in each of the paper and consumer electric businesses are distinct, necessitating different management approaches and focus. This is particularly so in view of the recent diversification of the Electric business by addition of several new product lines. We believe that the proposed demerger will ensure management focus and enhanced accountability of these distinctly different businesses leading to an unencumbered growth of both businesses independently. The demerger will also provide investors with the opportunity to take investment calls on either of
the businesses.
Most importantly, this should create significant value for all our shareholders as the sum-of-parts is expected to be greater than the whole, as amply demonstrated by the earlier demerger of t e cement business. How earlier the demerger of cement business created significant value.
The broad contours and status of the proposed demerger of the electric business It is proposed to demerge the Electric business from Orient Paper and Industries Limited (OPIL) with effect from 1st March 2017, subject to required statutory approvals.
Under the proposedscheme, each shareholder of OPIL will receive one share of Orient Electric Limited for every share held in OPIL. Thus, the demerger is proposed in a most fair and transparent manner, providing each shareholder with an equal opportunity to participate in the expected value creation.
Demerger: Unlocking value of both businesses
Orient Paper & Industries Ltd (OPIL), a CK Birla group company, has two business models:
Paper (OPIL-P): Makes writing, printing, and tissue paper.
Consumer electricals (OEL): Fans, lighting, appliances, and switchgear.
Key benefits of restructuring:
Creation of a pure-play electricals company will provide existing shareholders with an opportunity to participate directly in the
electricals business
Assigns greater accountability for each of the businesses
Enables both entities to explore various options to augment growth plans
Demerger allows both companies to find their true value
Prospect of Paper Business
The company Paper business has achieved a smart turnaround, mainly as a result of our sustained efforts towards cost reduction and efficiency improvements. This is clearly reflected in its Paper business has reported good financial growth during FY16-17 despite the impact of a 35-day
shutdown due to water scarcity during the first quarter of the year. According to the management of the company,it has already completed our Tissue paper expansion project and have started commercial production with effect from 1st May 2017. This will double its Tissue paper
capacity and further consolidate our position as the largest producers and exporters of Tissue papers from India. This will also contribute to increasing volumes and profitability of the paper business.”
In the last two years, its paper business has achieved a strong turnaround with an impressive increase in profitability. The improvement was majorly because of improving demand in the paper industry, strong cost control by the company, and better product mix (from the highermargin tissue segment).
Prospect of Electric Business
Electric business also achieved close to 5% growth in turnover, despite a temporary setback during the demonetization period. This reflects the core strength of the Orient brand in the consumer segment. Some of the highlights of this business include the launch of several premium
models of fans including the Aeroquiet range, significant growth in LED lighting making it the third largest producers of LED lamps in India and an impressive increase in its appliance business.
Demerged company Orient Electric Ltd is a leading player in consumer electric products and has added lighting, appliances, and switchgears to its portfolio; its market share has been increasing. Currently, about 70% of the revenue comes from fans, which remains its bastion. It has
increased its presence in premium fans and is currently a market leader in this segment. Each of these product groups provides huge market potential and scope for accelerated growth. The management of the company expects this division’s revenue CAGR at 15% over the next 2-3 years.
Fans ‘Very Silent, Very Powerful’
11.1% value growth in the domestic market, growing faster than the industry average • Launched the Aero series range aiming to capture a significant share in the super premium segment
Commissioned a new manufacturing facility at Guwahati, which will help in expanding market reach
Despite a steep increase in raw material prices, margin levels were maintained around an improved product mix and better price realisations
Continued to hold 60% market share in exports of fans from India
In-house R&D unit at Faridabad plant received the prestigious DSIR certification
Lighting Increasing share in LEDs
Consolidated its position in the LED bulb segment, emerging a clear number 3 now
Trade sales grew by 13%, higher than the industry average
Started manufacturing LED street lights with good growth in the tenders business
Competence centre and the R&D lab for LED lighting upgraded
Home appliances ‘Enhanced product range’
Launched new models of air coolers, water heaters, electric irons and wet grinders
Registered a 35% increase in revenues
Product performance certified by Intertek, an internationally-acclaimed UK-based certification agency
Channel reach enhanced across focus markets
Stronger brand value would give good growth
The fans industry remains competitive with new players entering the market and every major/bigger player fighting for market share. However, OEL has maintained its market share over 3-4 years, majorly because of its strong distribution network and product innovation. To guard itself
from heavy competition, OEL has also focussed on exports. It has a healthy market share of 60% of total fans exported from India, with a strong presence in the Middle East and in Africa. It also exports fans to the US and some European countries. It has plans to increase its penetration deeper in all these markets (currently exporting to about 35 countries). It plans to add new products for exports.
Next steps post demerger:
The investors need to keep the both stocks ( Orient Paper + Orient Electric) for further gain in long term.
Both companies are having very good growth potential. Those investors who are holding the stock ( Orient Paper and Industries ) till 12.01.2018 in their demat accounts are eligible to get Orient Electric shares in the ratio of 1:1.
It is not advisable to buy Orient Paper at cmp. It is not advisable to buy any stock + / - 10 % from suggested price.
Prospects of Orient electric following the demerger
Orient Electric is already a leading player in consumer electric products and strong turnaround with impressive improvement in its profitability over the last two years. It has added Lighting, Appliances and Switchgears to its product portfolio in the last 3-4 years. Fans remain its stronghold with an
increasing presence in premium categories. Each of these product groups also provides huge market potential and scope for accelerated growth.
Orient Electric enjoys strong brand equity with a pan-India distribution network and significant presence in export markets as well. Therefore, there is abundant opportunity and scope for Orient Electric to grow multi-fold with dedicated management focus and strong cash flows. Thus it is
expected that the stock will see a price target of Rs.165, to be list around in next two month, on the basis of industry P/E of 53.37x and EPS of Rs.3.08. On the Valuation front, Thus it is expected that the stock will see a price target of Rs.258 in 8 to 10 months time frame on an industry average P/Ex of 53.37x and FY19 EPS of Rs.4.84.
Prospects of Paper business following the demerger
Orient’s paper business has already achieved a strong turnaround with impressive increases in its profitability in the last two years. It has taken major steps towards cost optimization and improving the availability of its key components such as water, RM (pulp), and power (coal). The management of the company expects the performance of this business to stay sustainable in the long term, as the improvement was primarily achieved through internal efforts towards cost optimization and also expects the new tissue capacity to provide a further boost to profitability. Thus it is expected
that the stock will see a price target of Rs. 43.5 with immediate effect of ex-date of demerger. On the Valuation front, thus it is expected
If the price is above that range then need to wait for the correction or go for next stock. If the price is below that range then we will give an update on it(if required).
Generally, demerger process is taking 12 -18 months time from date of the proposal to the final listing.We have picked the stocks at mid of the process and Orient Electric is expected to list within next 4 months. We are keeping one stock with ongoing demerger process so that it will help to improve habit of holding the stock with patience for the longer period.
If allocation is near 20% or above then partial profit can be booked near 100% to make the remaining holding free of cost and reinvestment to expand the portfolio without adding fresh fund. Profit can be booked at any time from 100% - 500% or above based on your holding capacity and financial needs.
Our investment in all stocks are for long term and irrespective of weak or good quarterly results. If there is any serious change in fundamental or future business prospectus of the company then only we will review and alter our investment decision.
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