First story-Orient Demerger
Notes on orient demerger-part-1. taken from annual report.
Excerpt from AR of orient-
In order to harness the full potential of emerging opportunities, we have decided to demerge our Electric business with effect from 1st March 2017. The principal rationale for the demerger is to unlock shareholder value. It may be recalled that the demerger of cement business has resulted in a combined market capitalisation of the two entities i.e. Orient Paper & Industries Limited and Orient Cement Limited increasing over 3-fold to H4,413 crores as on 31 March 2017. The proposed 1:1 share ratio will provide all shareholders with an equal opportunity to participate in the expected value creation. The demerger of the Electric business will also permit both businesses to pursue their independent growth strategies with even greater vigour.
Paper business – core highlights As you will see from this report, our 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 our PBIDT from Paper business increasing by 63% from H34.93 crores in 2015-16 to H56.97 crores in 2016-17 despite the impact of a 35-day shutdown due to water scarcity during the first quarter of the year,
“We also completed our Tissue paper expansion project and have started commercial production with effect from 1st May 2017. This will double our 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.”
Electric business – core highlights Our Electric business also achieved close to 5% growth in turnover to H1,363.70 crores, 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 us the third largest producers of LED lamps in India and an impressive increase in our appliance business. As a result, PBIDT of our Electric business also increased by 16.2% from H90.78 crores in 2015-16 to H105.48 crores in 2016-17
Revenues PBIDT marginally lower by 3% Range: Tissue papers and writing and printing papers Manufacturing facility: Amlai, Madhya Pradesh H503.28 crores Higher by 63%
Fans, home appliances, lighting and switchgear India’s largest exporters of fans Higher by Higher by 5% 17%
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 • Conferred the prestigious ‘National Energy and Conservation Award, 2016’
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
Proposed demerger – its objectives and structure
The primary rationale behind the demerger of the electric business 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 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 the cement business. How earlier the demerger of cement business created significant value.
Demerger of the cement business from Orient Paper and Industries came into effect on 1st April, 2012.
The pre-demerger market cap of Orient Paper & Industries Limited stood at Rs 1,210 crore. In just five years since, the combined market cap of Orient Paper & Industries Limited and Orient Cement Limited had increased by 365% to Rs.4,413 crore as at 31st March 2017.
In addition, both companies have grown significantly with substantial addition to capacities and product offerings. 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 proposed scheme, 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. The proposed demerger has already received in-principle approval from SEBI and Stock exchanges and is now awaiting a final approval from National Company Law Tribunal (NCLT). On receipt of the final clearance from NCLT, Orient Electric Limited will seek approval for getting listed on the stock exchanges.
Prospects of Orient Electric following the demerger
Orient Electric is already a leading player in consumer electric products and has added Lighting, Appliances and Switchgears to its product portfolio in the last 3-4 years. As shown elsewhere in this report, Orient’s market share has been increasing in each of these products within a short time since launch. Fans remain its stronghold with an increasing presence in premium categories. Each of these product groups also provide 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.
Standalone sustainability of the paper business
Orient’s paper business has already achieved a strong turnaround with impressive increases in its profitability in the last two years with PBIDT for 2016-17 going up to H56.97 crore despite a 35-day shutdown during the first quarter due to water shortage.
Some other reassuring factors for our paper business
It is important to mention that only the Electric business is being demerged and all other assets of the company, including its substantial investments and properties, shall be retained within the existing company. The debt-equity ratio of the residual company will also be quite favourable with aggregate debt of less than H150 crore being allocated to the Paper business as on the date of demerger.