Orient Paper to demerge electrical appliances division

Kolkata: Orient Paper and Industries Ltd decided to demerge its electrical appliances division to unlock shareholder value, a top official said.

Last week, the CK Birla group company said it will separate its paper and appliance businesses and raise Rs50 crore through a rights issue to repay loans.

“The earlier conglomerate model of running multiple businesses under one company does not get you fair valuation,” said managing director Manohar Lal Pachisia said in an interview. That marks a break from tradition: many companies based in Kolkata’s Birla Building—the common headquarters of the extended Birla family—still have multiple businesses which are not related to each other.

Companies do not get a “sum-of-parts valuation”, Pachisia said.

In July 2011, Orient Paper carved out its cement business as Orient Cement Ltd. At that time, Orient Paper had a market capitalization of only Rs1,000 crore, according to P.K. Sonthalia, president (finance) and chief financial officer of Orient Paper.

The combined market capitalization of Orient Cement and Orient Paper has now crossed Rs5,500 crore—5.5 times the valuation five years ago, he said, adding the separation of the paper and appliances businesses is also expected to “unlock shareholder value” in a similar way.

Orient Cement has a market capitalization of around Rs4,000 crore, while Orient Paper is valued at a little over Rs1,600 crore.

According to Pachisia, the situation has improved for the paper division, which once went through a difficult period and did not have enough cash flows, and the management decided it was time to create two focused companies.

The court process of concluding the demerger will take 9-12 months, Sonthalia said. The rights issue will be completed by the end of December. HDFC Bank and law firm Khaitan and Co. are advising the company on the restructuring. The company expects to commission its ongoing tissue paper capacity expansion within months. After this, revenue from the division will go up by around 30% from Rs500 crore to Rs650 crore annually, Sonthalia said. The electrical appliances division, which sells fans, lighting products, kitchen appliances and switchgears, clocks around Rs1,500 crore in annual revenue, he added.

Separate teams of professionals manage the two divisions; so in terms of management, there won’t be any change, according to Pachisia. The company doesn’t have any immediate plan to sell shares in either of the two businesses, he added. Orient Paper’s valuation suffered because of its previously loss-making paper business, Ambit Capital Pvt. Ltd had said in a research report last month.

The division made losses continuously for five years between fiscal 2010 and 2015. However, in the fans business, Orient Paper is India’s second largest and the biggest exporter from the country, according to Ambit Capital. Still, its operating margin is lower than its peers largely because it has not been able to ramp up sales of higher-margin premium fans unlike its competitors, it said.