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 12,695-71 -322-1.6 - FY14 15,766 459 42 0.2 19.3 Stock performance (%) Date June 11, 2014 Market Data SENSEX 25443 Nifty 7602 Bloomberg Shares o/s Market Cap OPI IN 205mn Rs. 6.3bn 52-wk High-Low Rs. 32-4 3m 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 +91 44 4344 0022 Ravi Swaminathan ravi@sparkcapital.in +91 44 4344 0058 1
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 2013. 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 97 02 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
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 5,888 596 903 1,226 530-119 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
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 80 80 80 80 80 80 80 80 80 Total 15,270 17,341 19,702 15,270 17,976 21,183 15,270 17,976 21,183 EBIT (incl.other income) Paper -148-163 -179-148 - - -148 96 110 Electricals 639 736 846 639 861 1,112 639 965 1,293 Others 4 4 4 4 4 4 4 4 4 495 577 671 495 865 1,116 495 1,065 1,407 Unallocable expenditure 109 124 140 109 128 151 109 128 151 Interest 371 400 400 371 400 400 371 400 400 PBT 15 54 131 15 337 565 15 537 856 Taxes @ 20% -28 11 26-28 67 113-28 107 171 PAT 43 43 105 43 269 452 43 430 685 EPS (Rs. ) 0.2 0.2 0.5 0.2 1.3 2.2 0.2 2.1 3.3 P/E (x) 149 148 61 149 24 14 149 15 9 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
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 115 173 36-431 -333-643 -778-148 Electricals 78 219 339 617 573 530 591 639 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 205 205 Stock in trade -91-177 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 521 582 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 90 89 EBITDA -71 459 Inventories 1,332 1,629 OI 177 395 Debtors 3,290 4,295 Dep 367 468 Cash 181 253 EBIT -261 386 Short term loans 437 370 Interest 192 371 Total 11,061 12,176 PBT -453 15 Inventory days 40 39 Tax -131-28 Debtor days 116 119 PAT -322 42 Creditor days 95 99 EPS -1.6 0.2 Working Cycle (days) 62 60 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
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