Bulls Eye Stocks – A Medium Term Investment Package

Orient Cements (BUY) – Bulls Eye CallMaximum Allocation :- 8-10 %

Entry : Buying Strategy

1st Phase (Now) of Accumulation :- 65% of Allocation.

Front Ended buying can be done in this Stock and everydip can be used for accumulation. Any price less than 48Rs/ Share is an attractive Buying price.Exit : Selling Strategy

We would exit as the stock re-rates and moves near itsIntrinsic Value and we believe that a few QuarterlyEarnings would be the Trigger for this to happen.Classification Type : Event based Value Buy.

One Liner on Call :- For Technical reasons, we are ableto buy a Well Run Cement company at damn cheapvaluations. We intend to profit from the temporaryInefficiency of the Market in valuing the company andeventually would exit as the Market comes to terms withthe company’s actual Value.

Current Dividend Yield :Orient Cement :- 4.4 %

Accumulation Range :Orient Cement = 42-48 Rs/ Share.

Reasoning :Capitalizing on the Technical Correctionin a New Listing.

Significant Triggers –• Quarterly Earnings numbers.• Strong Dividend Yield.• Huge Relative Undervaluation.

Strategy –Buy the Stock in the early days of itsListing and exit as Market comes toterms with the Stock.

Target Price/ Stop Loss –Orient Cement = 75 / 30

Time Frame – 6 to 12 Months (See : Exit)

Maximum Allocation :- 8-10 %

Entry : Buying Strategy

1st Phase (Now) of Accumulation :- 65% of Allocation.

Front Ended buying can be done in this Stock and everydip can be used for accumulation. Any price less than 48Rs/ Share is an attractive Buying price.Exit : Selling Strategy

We would exit as the stock re-rates and moves near itsIntrinsic Value and we believe that a few QuarterlyEarnings would be the Trigger for this to happen.Classification Type : Event based Value Buy.

One Liner on Call :- For Technical reasons, we are ableto buy a Well Run Cement company at damn cheapvaluations. We intend to profit from the temporaryInefficiency of the Market in valuing the company andeventually would exit as the Market comes to terms withthe company’s actual Value.

Current Dividend Yield :Orient Cement :- 4.4 %

Accumulation Range :Orient Cement = 42-48 Rs/ Share.

Reasoning :Capitalizing on the Technical Correctionin a New Listing.

Significant Triggers –• Quarterly Earnings numbers.• Strong Dividend Yield.• Huge Relative Undervaluation.

Strategy –Buy the Stock in the early days of itsListing and exit as Market comes toterms with the Stock.

Target Price/ Stop Loss –Orient Cement = 75 / 30

Time Frame – 6 to 12 Months (See : Exit)

Core Investment ThesisTactical Triggers :-

Macro Outlook :- Special Situation Call on a Mis-Priced Opportunity.Cyclical Factors :- Pre-Election Boost, Better Supply-Demand scenario.Entry Triggers :- Arbitrageurs Exit, New Listing, Technical Weakness.

Undervaluation Metrics :

Enterprise Value to Replacement Cost – available at 0.3X its Replacement Value.

EV/ EBIDTA Multiple – less than 4X.

Discount to related Peer Stocks – Over 50% Discount to its competitors.

Serious No Issues :

Good Corporate Governance – Birla Group.

Clean Balance Sheet – Meager Debt.

Conclusion :There had been a Huge Arbitrage build up in the erstwhile – Orient Papers & Cement stockwith the view of Value Un-locking while the company de-merges and lists independently. But the rush ofArbitrageurs to exit the newly listed Stock has led to a deep undervaluation in the price at which the Stockgot listed in Indian Markets throwing Opportunities for Special Situation Investors like us to buy in this Panicand sell it as the company moves towards its actual Intrinsic Value.

Tactical Triggers :-

Macro Outlook :- Special Situation Call on a Mis-Priced Opportunity.Cyclical Factors :- Pre-Election Boost, Better Supply-Demand scenario.Entry Triggers :- Arbitrageurs Exit, New Listing, Technical Weakness.

Undervaluation Metrics :

Enterprise Value to Replacement Cost – available at 0.3X its Replacement Value.

EV/ EBIDTA Multiple – less than 4X.

Discount to related Peer Stocks – Over 50% Discount to its competitors.

Serious No Issues :

Good Corporate Governance – Birla Group.

Clean Balance Sheet – Meager Debt.

Conclusion :There had been a Huge Arbitrage build up in the erstwhile – Orient Papers & Cement stockwith the view of Value Un-locking while the company de-merges and lists independently. But the rush ofArbitrageurs to exit the newly listed Stock has led to a deep undervaluation in the price at which the Stockgot listed in Indian Markets throwing Opportunities for Special Situation Investors like us to buy in this Panicand sell it as the company moves towards its actual Intrinsic Value.

Investment Analysis & Rationale

Demerger in March - 2013

New Listing of Orient Cement – July 2013

• The Arbitrageurs had expected a Listing of the Stock at around 70-75 Rs/ Share. With the Share listing atmuch lower levels, there has been a strong Unwinding from such Arbitrage positions leading to very strongcorrection where it looks extremely attractive for an Investor with a 6-12 Months timeframe.

• We believe that the severe correction in the Parent – OPIL stock also had a lot to do with the severecorrection and unwinding in this stock. The current price which presents a Market Capitalization of around950 Cr Rs is extremely attractive for this Stock and you can find the Intrinsic Value details of the company inthe following Slides,

Brief Financials – Orient Cement

• Orient Cement has been a generating GoodOperating Profits for the past several years. WhileCement is a cyclical sector, it is better to be valuedat around Normalized EBIDTA Multiple (or) useAcquisition value & Replacement Value asAnchors to find the Intrinsic Value.

• The Company has Integrated operations withover 50 MW of power leading to above averageMargins and good returns on capital Employed.

• Last year’s Margin compression was due toCyclical elements along with Geographical Issues inSouth & West Markets leading to lower profits onan aggregate basis.

Parameter s Amount

Normalized Average EBIDTA 315 Cr Rs

Current Enterprise Valuation 1050 Cr Rs

• Orient Cement has been a generating GoodOperating Profits for the past several years. WhileCement is a cyclical sector, it is better to be valuedat around Normalized EBIDTA Multiple (or) useAcquisition value & Replacement Value asAnchors to find the Intrinsic Value.

• The Company has Integrated operations withover 50 MW of power leading to above averageMargins and good returns on capital Employed.

• Last year’s Margin compression was due toCyclical elements along with Geographical Issues inSouth & West Markets leading to lower profits onan aggregate basis.

Current Enterprise Valuation 1050 Cr Rs

Total Debt ~ 100 Cr Rs

EV/ EBIDTA Multiple 3.3X

Price/ Earnings per share < 6X

Forward EV/ EBIDTA Multiple < 2.5X

Total Cement Capacity 5 MT

New Capacity addition 3 MT

Total Power Generation Capacity 50 MW

Mergers & Acquisition Cost

Valuation Metrics on Replacement Cost

• Telengana Issue :-

Telengana and Vidarbha areimportant markets for OrientCement and the Issues withthese markets have pulleddown the EBIDTA in FY-13. Webelieve that this would getsolved slowly and in fact aresolution on Telengana wouldlead to huge constructionactivity in the new statebenefiting Orient Cements.

Immediate Triggers

• Capacity Expansion :-

Company has planned a 3 MT capacity expansion in Gulbarga which has raw material tied-up and thiswould help the company to generate Higher revenues and EBIDTA going forward and this is not evenfactored in any of our estimates.

• Pre-Election Boom :-

Generally in a Pre-Election year, construction picks up in Rural areas and this boom would definitelyhelp the company to post better numbers over this year and also the pick up in Indian economy would leadto better Off takes in Cement consumption.

• Better Margins as Better Supply-Demand Match :- over the next few years based on planned Capacity.

• Telengana Issue :-

Telengana and Vidarbha areimportant markets for OrientCement and the Issues withthese markets have pulleddown the EBIDTA in FY-13. Webelieve that this would getsolved slowly and in fact aresolution on Telengana wouldlead to huge constructionactivity in the new statebenefiting Orient Cements.

• Capacity Expansion :-

Company has planned a 3 MT capacity expansion in Gulbarga which has raw material tied-up and thiswould help the company to generate Higher revenues and EBIDTA going forward and this is not evenfactored in any of our estimates.

• Pre-Election Boom :-

Generally in a Pre-Election year, construction picks up in Rural areas and this boom would definitelyhelp the company to post better numbers over this year and also the pick up in Indian economy would leadto better Off takes in Cement consumption.

• Better Margins as Better Supply-Demand Match :- over the next few years based on planned Capacity.

Relative Performance

• Orient Cement has had above averageperformance in EBIDTA level amongst allCement companies and has been one of thebest performers in terms of Efficiency.

• Orient Cement also has one of the leastLeveraged Balance Sheets in the Cement sectorespecially in the Midcap Cement space.

• Company has no Corporate Governance Issuesand is one of the well managed entities of thelarger Birla group.

• All of this should have resulted in the companytrading at a slight premium to its Peers, but onthe other hand – the Stock is trading at a Hugediscount to its Peers and thus allowing ActiveInvestors like us to Profit from this MarketInefficiency over a Medium Term time frame.

• Orient Cement has had above averageperformance in EBIDTA level amongst allCement companies and has been one of thebest performers in terms of Efficiency.

• Orient Cement also has one of the leastLeveraged Balance Sheets in the Cement sectorespecially in the Midcap Cement space.

• Company has no Corporate Governance Issuesand is one of the well managed entities of thelarger Birla group.

• All of this should have resulted in the companytrading at a slight premium to its Peers, but onthe other hand – the Stock is trading at a Hugediscount to its Peers and thus allowing ActiveInvestors like us to Profit from this MarketInefficiency over a Medium Term time frame.

Valuation Discount to Peers : over 50% and insome cases over 100% which is not necessitated.

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