Dear Readers,

This is with respect to Orient Refractories (NSE Code – ORIENTREF): Speculation cum Special situation opportunity initiated on 14th May’12 for the Alpha + members.

This opportunity was initiated in May’12 at around Rs 34.5 and was based on a speculation regarding takeover of Orient Refractories by RHI AG, Germany.

Well, the news of RHI acquiring controlling stake in Orient Refractories have re-surfaced and can be accessed here

If the deal does go through at the suggested rates, RHI will have to come up with an open offer at Rs 47 and the stock may inch up to Rs 42-43.

Considering the fact there’s not much upside left from our presumed levels of Rs 42-43, we recently suggested our Alpha + members to book complete profit at around 40.50 with a gain of 18% in around 6.5 months.

The detailed note shared with Alpha + members on 14th May’12 has been produced below for your reference.

14th May’12 – Proposed takeover of Orient Refractories Ltd (NSE Code – ORIENTREF)

Dear Members,

We would like to share with you an interesting opportunity on Orient Refractories Ltd (NSE Code – ORIENTREF)

Before we proceed with the details, please make a note of the following:

  1. This is not a conventional special situation opportunity. It has an element of speculation to it.
  2. The potential gains could be ~30%, while the loss could be to the tune of 15%.
  3. In case you participate, please do not over allocate.


Orient Refractories Ltd (ORL) got listed recently as it entered into a Scheme of Arrangement with Orient Abrasives Limited (OAL) and their respective shareholders for demerger of the refractory business of OAL into Orient Refractories Ltd.

The demerger was carried out in Nov’11 and the stock got listed on 9th Mar’12.

Since the time the company announced the demerger of refractory division into ORL, we have been tracking the stock and got in touch with the company officials at that point of time. We were evaluating the demerger from the point of view of value unlocking, however we couldn’t find any substantial reason for the company to demerge refractory division and also the stock seemed fairly valued at ~10 times earnings.

Also, the abrasives and the refractory division were not entirely un-related and thus couldn’t fathom the reason for de-merger.

In our talks with the company official during Oct-Nov’11, he alluded towards possible collaboration/partnership with a MNC for their refractory division and thus justified the demerger of the refractory division into a separate listed unit.

Then, we could not draw much inference from the above; however, recently a news report suggested the following:

Germany’s RHI AG, a leading refractory manufacturer, may acquire Delhi-based Orient Refractories in a transaction valued at about Rs 600 crore, two people close to the development said. The deal is likely to be signed in the second week of June.

Talks between the two companies have been going on from last year. Orient Abrasives split its refractory division into Orient Refractories with the intention of selling a stake.

So, probably the company official was alluding towards a possible takeover by RHI, under the wraps of collaboration/partnership.

Now, refer the below news published in Austrian Media which mentions about RHIs CEO confirming about a possible takeover of an Indian company


It is important to note here that RHI is one of the largest manufacturers of refractories with close to 1.8 billion Euros in sales. Also, in the past they acquired 51% stake in Clasil Refractories in India.

We believe, the acquisition of ORL by RHI is a very high probability case and derive our optimism from the fact that:

  1. Orient de-merged the unit when in fact there was no real need from the point of value unlocking. Rather, the operations of the company were pretty much related to each other and were not entirely different line of businesses.
  2. Though company official didn’t directly mention about takeover, he did point towards partnership/collaboration way back in Nov’11 and thus media report could be true that the two companies have been discussing since 2011.
  3. Besides, Orient has a history of divesting its one or the other unit, as they did in 2006-07 when they sold Bonded Abrasives business to Grindwell Norton.
  4. RHI’s CEO confirming the news of probable takeover of Indian company.


Any investment operation is not completely risk free and here too one of the major risks is the collapse of negotiation, if any, between the two parties. Since the deal has not been publicly announced by the company, there’s an element of speculation to this investment operation.

Another concern with this investment operation is that since ORL will deny any takeover deal till they actually strike a deal with RHI, it’s difficult to quantify the holding period, though media reports suggest second week of Jun’12.

What will happen in case the two parties do not reach a consensus (on any matter) and the talks are called off?

Orient Refractories has a long standing operating history with good overall performance over the years. Recently, the company announced its results for FY 12 and the company has again reported decent performance with a turnover of Rs 302 crores and a net profit of Rs 31 crore.

The company does not have much debt with short term borrowings at just Rs 12.7 crores.

The stock is currently available at a market cap of Rs 400 crores and thus trading at 13 times trailing twelve months earnings. Though, this is not exactly cheap, however the valuations are not exorbitant at the same time. A fair valuation zone could somewhere be in the range of 9-11 times TTM earnings.

Also, the company recently announced an interim dividend of Rs 1.00 per share and thus offering a dividend yield of 2.90% on interim dividend alone.

On account of the above, we believe the downside seems restricted at 15% in case the talks are called off or if there’s no deal at all.

Allocation strategy

The risk reward pay-off is skewed in our favor and though it’s difficult to quantify probability, we have already outlined our reasons for optimism.

However, one has to also acknowledge the fact that 15% is a reasonable downside and thus we suggest only 2% allocation in the range of 34-35.

Best Regards,
Ekansh Mittal
Ph.: 0120-4109766, Mob: +91-9818866676
Email: [email protected]