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Tuesday, July 03, 2007

Orient Paper and Industries, TFCI


Orient Paper and Industries
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs680
Current market price: Rs427

Price target revised to Rs680

Result highlights

  • In Q4FY2007 the cement revenues of Orient Paper and Industries (Orient Paper) grew by a robust 33% year on year (yoy) to Rs166.7 crore, helping the overall business to grow by a healthy 22% yoy to Rs340.3 crore. Backed by the stellar performance of the cement division, the company's net profit for FY2007 doubled to Rs59.6 crore.
  • For the full year, the company registered a robust top line growth of 28.5% yoy to Rs1,102 crore backed by a 100% growth in its cement revenues to Rs591 crore. The fan business grew by 26% yoy to Rs242 crore whereas the paper revenues were flat at Rs262 crore over the same period.
  • With the realisations growing by 25-30% in FY2007, the earnings before interest and tax (EBIT) of the cement division grew by a mammoth 431% yoy to Rs226 crore whereas its margin expanded by a whopping 2,380 basis points to 38% in FY2007. On the back of the superb performance of the cement division the EBIT of the company grew by 235% yoy to Rs252 crore whereas the margin expanded by 1,100 basis points to 22% in FY2007. The margin could have been higher but for the margin pressure faced by the paper and fan businesses during the fiscal.
  • With the company not adding any asset during the year, the depreciation provision stood flat at Rs26 crore whereas the interest cost reduced by Rs9 crore to Rs32.7 crore in FY2007, as the company repaid debt to the tune of Rs111 crore during the year.
  • The company received Rs6.4 crore as the estimated net realisable value of Certified Emission Reduction (CER) units received during the quarter ended March 2007 at its cement plant. The other income component for the fiscal stood at Rs14 crore. Backed by the stupendous performance at the operating level, the adjusted net profit grew six fold to Rs130 crore.
  • The company has planned capital expenditure (capex) of Rs640 crore for the next three years (it has already spent about Rs60 crore of the same) to augment its cement capacity by 2.6 million metric tonne (MMT) including a captive power plant (CPP) of 50 megawatt. It is also augmenting its tissue paper capacity by 20,000 tonne and has already increased its fan capacity.
  • As mentioned in our earlier reports, the company is raising Rs160 crore through a rights issue at a price of Rs360 per share. This will result in additional capital of Rs4.44 crore, thereby diluting the equity share capital by 30%. The company will use the proceeds to part finance its capex drive.
  • The incremental volumes from the augmented cement capacity, higher blending and savings from power costs will drive the company's earnings in the next three years at a compounded annual growth rate (CAGR) of 15%. We believe that the company will be willing to sell its investment in Century Textiles, if need be, to fund its capital requirements. Thus we have considered it as part of liquid investments which provides a cushion of Rs54 per share to the stock. At the current market price of Rs427 the stock trades at 4.6x its FY2009 earnings per share (EPS) estimate whereas the cement business trades at a valuation of USD24.
  • Taking cognisance of the positive outlook for the company as well as the stock's attractive valuations we maintain our Buy recommendation on the stock with a reduced price target of Rs680.

Tourism Finance Corporation of India
Cluster: Cannonball
Recommendation: Buy
Price target: Rs30
Current market price: Rs22.7

Strong demand from hotels to benefit TFCI

Result highlights

  • For Q4FY2007 Tourism Finance Corporation of India (TFCI) has reported a 33.1% year-on-year (y-o-y) growth in its profit after tax (PAT) to Rs9.6 crore, which is ahead of our estimate of Rs8.6 crore. The quarter-on-quarter (q-o-q) PAT growth stood at 281.3% but since the earnings of the company are back-ended, the q-o-q PAT figure is not relevant.
  • TFCI has managed to register a healthy y-o-y growth of 81% in sanctions to Rs240 crore and of 36% in disbursements to Rs120 crore. The revival in the demand from the hotel and tourism sectors has helped TFCI register an 81% y-o-y growth in sanctions for FY2007 compared with a 20% sanction growth in FY2006.
  • The net interest income (NII) was up by 8.2% to Rs15.4 crore for Q4FY2007 and by 1.2% to Rs28.9 crore for FY2007. The substantial y-o-y growth in the other income to Rs0.45 crore from Rs0.01 crore in Q4FY2006 was achieved due to the consultancy services provided by the company.
  • The operating profit was up by 6.3% to Rs13.7 crore for Q4FY2007 but down 3% to Rs24.9 crore for FY2007.
  • Provisions and contingencies declined by 43.4% for Q4FY2007 and by 27.5% for FY2007, reflecting the lower provisioning requirement as the incremental non-performing assets (NPAs) remained very low. The net NPA was almost nil in March 2007.
  • We have made changes to our initial provisioning assumptions based on the significant improvement in the company's asset quality during FY2007. This has resulted in 12.3% and 14.2% increase in our PAT estimates to Rs20.2 crore and Rs27.5 crore for FY2008 and FY2009 respectively.
  • We expect TFCI's earnings to grow at a 32% compounded annual growth rate over the period FY2006-09. The business fundamentals of the company have improved significantly on the back of the capacity expansion in the hotel and tourism sectors planned for the next three to four years. Higher sanctions and significant improvement in the company's asset quality are testimonies to this fact. Again as per our expectations, the company has resumed dividend payment and declared a 5% dividend, which gives a 2.2% dividend yield. At the current market price of Rs22.7 the stock is quoting at 5.6x its FY2009E earnings and 0.6x FY2009E book value. We maintain our Buy recommendation on the stock with the price target of Rs30.

Orient Paper and Industries, TFCI