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Paper Products: Battered by slowdown - Views on News from Equitymaster

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Paper Products: Battered by slowdown

Feb 4, 2009

Performance summary
  • Sales grow at a muted pace of 0.4% YoY during 4QCY08 on account of economic slowdown. For the year, the topline is up 15% YoY.
  • Operating margins remain stable at 10% during CY08.
  • For CY08, the profits excluding extraordinary items decline by 29% YoY.

Rs (m) 4QCY07 4QCY08 Change CY07 CY08 Change
Net Sales 1,423 1,428 0.4% 5,321 6,121 15.0%
Expenditure 1,263 1,289 2.0% 4,762 5,484 15.2%
Operating Profit (EBDIT) 160 139 -12.9% 559 637 14.0%
Operating Profit Margin (%) 11.2% 9.7%   10.5% 10.4%  
Other Income 30 23 -22.5% 90 88 -1.7%
Interest 7 4 -39.7% 17 10 -43.4%
Depreciation 75 71 -5.9% 289 286 -0.8%
Forex gain/loss 4 (27)   11 (132)  
Profit before Tax 111 61 -45.4% 353 297 -15.9%
Extraordinary item - -   (15) 1  
Tax 20 23 17.6% 54 85 56.7%
Profit after Tax 91 37 -59.1% 284 213 -25.0%
Net profit margin (%) 6.4% 2.6%   3.5%  
No. of Shares (m) 62.5 62.5   62.5 62.5  
Diluted earnings per share* (x)         3.4  
P/E ratio (x)         9.1  
(*trailing 12 months)

What has driven performance in CY08?
  • Paper Products saw muted sales growth of 0.4% YoY during 4QCY08. This was primarily because its clients cut down their demand and had shut down the manufacturing plants as they resorted to destocking. Further PPL had during 2QCY08 and 3QCY08 taken price hikes to offset the higher raw material price. This led to volume slowdown during the current quarter on account of lag effect. For the year, the topline was up 15% YoY. The NASP segment continues to do well, with 30% contribution to revenues. Exports earned 24% of the revenues. Going forward, the company is looking at increasing volumes and may have to cut prices in order to drive growth.

  • The operating margins during the quarter declined by 1.5% YoY led by higher operating costs. For the full year, the margins remained stable. The company has earned operating margins marginally higher than our estimates.

    Cost break-up
    As a % of net sales 4QCY07 4QCY08 CY07 CY08
    Total Cost of goods 68.8% 69.3% 69.0% 69.6%
    Staff Cost 8.3% 9.1% 8.3% 8.1%
    Other Expenditure 11.7% 11.8% 12.2% 11.8%

  • Net profits during 4QCY08 declined by 59% YoY. The company had a forex loss of Rs 27 m (including Rs 17.3 m as a mark to market loss on valuation of forex contracts). For CY08, the profits, excluding the extraordinary items (excise duty provision, one time employee cost on account of closure of Nagpur plant and profits on sales of transferable development rights), declined by 29% YoY. It suffered losses to the tune of Rs 132 m during the full year on account of currency fluctuations. Excluding both these effects, the profits are up 19% YoY.

What to expect?
At the current price of Rs 32, the stock is trading at a price to earnings multiple of 3.7 times our CY10 estimates. While the company did witness pressure on account of slowdown, it expects things to improve from 2QCY09 on the back of better volume growth. It has no capex lined up in the coming year. Paper Products has also reduced its debt (debt equity of 0.2) and expects the margins to remain at current levels. Aggressive cost cutting initiatives and improving the cash flows would strengthen its balance sheet going forward.

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