Orient Paper and Industries

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1 Re-branding strategy and new products to drive growth in consumer business Orient Paper (OPI), a C.K.Birla group company is the second largest player in the fans market with 18% market share under the organized fans segment with production capacities of 9mn fans. OPI also manufactures paper with total capacities of 100k MT including tissue paper capacity of 25k MT. OPI over the last three years has entered into several product categories such as lighting and an array of small appliances which has increased its distribution/ad-spend. Operating margins should improve going forward with these products attaining scale. With the recent re-branding exercise, strong distribution network (~3,500 dealers/distributors and ~150k retail touch points) and gaining market acceptance of its new products, we believe OPI is well poised to benefit from the next growth wave in consumer durable sector. We expect the stock to re-rate further. Robust growth in electrical business: Electrical business with revenues of ~Rs. 11bn (FY14) and EBIT margin of 5.8% is growing at a strong pace (25% y-o-y in FY14, 24% CAGR between FY07-14). Fans contributed 80% of FY13 segment revenues. As the 2nd largest player after Crompton Greaves, OPI is gaining market share in the organized fans business. Volume growth in FY13 was at 10% v/s industry growth of ~ 6%. Re-branding exercise and new products to sustain growth momentum: OPI has re-defined its branding from a product (fan) company to a lifestyle home solutions provider. OPI has launched air coolers, water heaters and kitchen appliances over the past 1-2 years and has been witnessing significant traction (5.7% of segment sales in FY14). Our channel checks suggests, air cooler sales has been witnessing strong momentum while other products are expected to gain traction in the coming quarters. Paper business turning around: Paper business with a revenue of Rs. 4.2bn (FY14) has witnessed an EBIT level loss of Rs. 148mn, v/s Rs. 778mn losses in FY13. Losses are trending down due to lower power & fuel costs (commissioning of 55MW captive power during FY13) and higher utilization (due to improved water situation in Madhya Pradesh) Debt position under control, investments provide comfort: Total net debt as on FY14 at Rs. 3.1bn (vs. Rs. 3bn in FY13) is under control on the back of stable working capital position (60days vs. 62days in FY13). Current market value of investment in Century textiles and Hyderabad industries is ~Rs. 1bn (Rs.5/share) provides comfort Key risks: (1) Further losses in paper business (2) Contingent liability of account of disputed water tax demand (Rs. 3.6bn) with the Madhya Pradesh water board. (2) Past intentions to put coal-based power plant at the erstwhile paper mill location in Brajrajnagar, Orissa Financial summary Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) EV/EBITDA (x) FY13 12, FY14 15, Stock performance (%) Date June 11, 2014 Market Data SENSEX Nifty 7602 Bloomberg Shares o/s Market Cap OPI IN 205mn Rs. 6.3bn 52-wk High-Low Rs m Avg. Daily Vol Index member Rs. 17mn Latest shareholding (%) Promoters 38.2 Institutions 23.8 Public 38.0 BSESMCAP 1m 3m 12m OPI 27% 131% 342% Sensex 11% 16% 31% CG Index 30% 42% 76% Vijayaraghavan Swaminathan raghavan@sparkcapital.in Ravi Swaminathan ravi@sparkcapital.in

2 Company Factsheet Corporate Factsheet Company Background Presence Management depth Business Corporate Structure Revenue Model Capacity & Facilities Key Success Factors Credit Rating Auditors Established in 1954, Orient Paper and Industries, a part of the C.K.Birla Group, was started for the manufacturing of electrical goods and appliances including motors, exhaust and ventilation devices etc. Currently, the company is a leading players in the fans market and is also involved in the manufacture of paper (including tissue paper). The cement division was de-merged from the business in It caters majorly to the Indian market and derives ~10% of its sales from exports which includes both fans and tissue papers Mr. M.L. Pachisia Managing Director Mr. M.L. Pachisia, is a commerce graduate. He has over 50 years experience and has been a whole time Director of the Company between and was re-designated as the Managing Director of the company subsequently. Manoj Verma CEO, Orient Electric Mr. Manoj Verma became the CEO of Orient Electric in 2012 and has more than 30 years of experience in the lighting industry across major companies including Philips, GE and Crompton Greaves. Under his leadership, Crompton Greaves' fan business grew far better OPI is engaged in manufacture of consumer appliances, primarily fans and lighting products and has recently launched small appliances including air coolers, mixer grinders, water heaters etc. The company also manufactures printing & writing paper and tissue paper. OPI has the highest tissue paper manufacturing capacity ~25k MT As on FY13, Orient paper does not have any subsidiary Paper (27% of FY14 revenue), Electricals (72% of FY14 revenue) and others (1% of FY14 revenue) Paper division Manufacturing facility in Amlai, Madhya Pradesh - 100,000MT capacity (including tissue paper capacity of 25,000MT) Electricals division - Manufacturing facilities in Faridabad (Haryana), Kolkata capacity of 9mn pieces of fans Well established distribution network in the fans business and strong brand recall has led to strong growth in the electrical segment Long Term: A-, Short Term: A1+ (CRISIL) S. R. Batliboi & Co. LLP, Chartered Accountants 2

3 Business Overview Orient is the second largest player in fans after Crompton Greaves Strong growth in appliances and lighting albeit on a low base FY13 fan sales market share (%) Khaitan 6% Usha 17% Bajaj Electr 18% Havells 15% Crompt Greaves 26% Orient 18% 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - Consumer Durables segmental revenue (Rs. mn) 7,447 6,614 5, , FY11 FY12 FY13 Fans Lighting Products Appliance Source: Industry, Spark Capital Research In addition to Orient PSPO, Dhoni s contract was renewed during FY13 for another three years and is extended for all products Re-branding exercise with cricketer Dhoni as its brand ambassador for all products, introducing new company logo and increasing ad-spends. With strong distribution reach, we expect these efforts to drive growth in the new products going forward Source: Company, Spark Capital Research Dealer Commentary Witnessing strong traction in cooler Orient s air coolers has been witnessing strong demand recently. For every 10 pieces of Symphony s air coolers sold, 4-5 pieces of Orient s products are sold Orient Dealer, New Delhi Orient has priced its air coolers attractively at a 10-15% discount to Symphony s products. Also, kitchen appliances have been witnessing improved traction recently Orient Dealer, New Delhi Orient s fans has been a top selling brand and witnessing strong demand on the back of improved advertising (especially Dhoni s ad campaign) Multi brand appliance dealer, Gurgaon Orient s fans and air cooler sales has been robust over the past 2-3 months and have overtaken the market leaders in certain categories. Kitchen appliance sales is yet to witness traction Orient dealer, Madurai Source: Company, Spark Capital Research 3

4 Sensitivity Analysis Particulars (Rs. mn) BEAR CASE BASE CASE BULL CASE FY14 FY15 FY16 FY14 FY15 FY16 FY14 FY15 FY16 Paper 4,158 4,574 5,031 4,158 4,657 5,216 4,158 4,782 5,499 Electricals 11,033 12,688 14,591 11,033 13,239 15,887 11,033 13,791 17,239 Others Total 15,270 17,341 19,702 15,270 17,976 21,183 15,270 17,976 21,183 EBIT (incl.other income) Paper Electricals , ,293 Others , ,065 1,407 Unallocable expenditure Interest PBT % PAT EPS (Rs. ) P/E (x) EBIT Margin Paper -3.6% -3.6% -3.6% -3.6% 0.0% 0.0% -3.6% 2.0% 2.0% Electricals 5.8% 5.8% 5.8% 5.8% 6.5% 7.0% 5.8% 7.0% 7.5% Others 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% Assumptions Revenue growth Bear Case Paper segment 10% CAGR growth, Electricals segment 15% CAGR growth Base Case Paper segment 12% CAGR growth, Electricals segment 20% CAGR growth Bull Case Paper segment 15% CAGR growth, Electricals segment 25% CAGR growth EBIT Margin Bear Case Paper segment (3.6)%, Electricals segment 5.8% (both FY15E & FY16E) Base Case Paper segment 0.0%, Electricals segment 6.5% (FY15E) and 7.0% (FY16E) Bull Case Paper segment 2.0%, Electricals segment 7.0% (FY15E) and 7.5% (FY16E) 4

5 Key Financials Segmental break-up Revenue (Rs. mn) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Paper 3,487 3,541 2,900 2,394 2,774 3,286 3,422 4,158 Electricals 2,425 2,855 3,414 4,809 6,423 7,239 8,796 11,033 EBIT (Rs. mn) Paper Electricals EBIT margin (%) Paper 3.3% 4.9% 1.2% -18.0% -12.0% -19.6% -22.7% -3.6% Electricals 3.2% 7.7% 9.9% 12.8% 8.9% 7.3% 6.7% 5.8% Profit and Loss (Rs. mn) FY13 FY14 Balance Sheet (Rs. mn) FY13 FY14 Total Income 12,695 15,766 Share Capital Stock in trade Reserves 4,180 4,125 Purchase of traded goods 1,960 3,586 Networth 4,385 4,330 RM cost 5,913 6,430 Long term borrowings 400 Stores Short term borrowings 3,053 2,872 Trade payables 2,143 3,049 Employee 1,229 1,455 Total 11,061 12,176 Other Expenditure 1,387 1,636 Net block 5,532 5,209 Total Expenditure 12,766 15,307 n current investments EBITDA Inventories 1,332 1,629 OI Debtors 3,290 4,295 Dep Cash EBIT Short term loans Interest Total 11,061 12,176 PBT Inventory days Tax Debtor days PAT Creditor days EPS Working Cycle (days) Losses in the paper business has been tapering on the back of lower power costs (captive power plant) and improved utilizations (~60%). The segment had been EBIT positive between FY07-FY09 Margins in the electrical segment has been subdued due to higher advertising spends by the company to drive growth. The electrical segment has grown at a CAGR of 24% between FY07 and FY14 5

6 Absolute Rating Interpretation Recommendation History Buy Add Stock expected to provide positive returns of >15% over a 1-year horizon Stock expected to provide positive returns of >5% <15% over a 1-year horizon Date Target price Rating NA Reduce Stock expected to provide returns of <5% -10% over a 1-year horizon Sell Stock expected to fall >10% over a 1-year horizon Spark Disclaimer Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker. This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. thing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Spark Capital and/or its affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such applicable restrictions. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this document. Spark Capital, its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark Capital. While we would endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information. Also, there may be regulatory, compliance or other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective directors, employees, agents or representatives shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the report or the inability to use or access our service in this report or for any loss or damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits that may arise from or in connection with the use of or reliance on this report. Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report: 6

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