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Paper Products: Research meet extracts

Mar 15, 2007

We recently had a meeting with the management of Paper Products to get an insight into the company’s performance and its growth prospects going forward. Here are the key takeaways from the meeting.

About the company
Paper Products Limited (PPL) is India’s leading manufacturer of primary consumer packaging and labelling materials. The company has a history of over seven decades in the packaging field and its product folio includes flexible packaging, labelling technologies and specialised cartons. It has three fully integrated manufacturing units at Thane, Silvassa and Hyderabad. The company’s client list includes HLL, Nestle, Cadbury, Britannia, GlaxoSmithKline, Coca Cola, Perfetti, Dabur, Marico and P&G. Exports constitute around 14% of total revenues and the company’s international division services large multinationals like Nestle, Unilever, Cadbury and Colgate Palmolive across four continents. In 1999, PPL became a subsidiary of Huhtamaki, a global leader in consumer packaging, which holds a 59% stake in the company. Huhtamaki is headquartered in Finland and is one of the top 10 consumer packaging companies in the world.

Volume game: As per the management, the volumes are slated to grow by more than 40% over the next three years. This would be led by the growth in the FMCG sector, the shift of preference from rigid packaging to convenience packaging. Also, modern retail would be the growth driver. The company is not easily dispensable, considering the importance of its packaging material for FMCG companies. The company is going to benefit on the volume front with the high growth in the FMCG sector. However, due to low bargaining power and price sensitiveness of markets, revenues may grow at a slower pace over the same period. The company is also bullish on the food segment. Though currently it has no contracts in the pipeline, it expects the same to contribute to the topline going forward.

NASP and exports: The nature of the packaging industry is highly fragmented and competitive. Differentiation is the only mode of survival. PPL in order to command a higher price for its products and improve margins has come out with its innovation initiative NASP (New Application, Structure and Products). This will aid volume growth along with market expansion. It will also help in offsetting margin loss of its other non-NASP products, where it has a weak pricing power, hence margins would be stable at current levels. The share of the new product is around 27% of sales in CY06 and is expected to touch 30% in the next two years. Also exports, which are currently around 15%, are expected to touch around 20% in the next two years.

Capacity expansion: In order to meet the growing demand, the company is in the process of expanding its manufacturing capacity by setting up an additional facility at Rudrapur in Uttaranchal. The cost of the project is Rs 650 m and the first phase will be partly operational from 1QCY07. It will be funded largely through internal accruals. This greenfield project, once completed, will account for around 25% of the company’s capacity. Also, with most of the FMCG majors having their plants in the northern region, this will help the company save on the time and transportation cost. PPL will get tax exemptions, thus positively impacting profitability.

Margin scenario: Polymer based plastic films are the main raw materials used for manufacturing packaging films by the company. These plastic films are linked with the crude prices that continue to be volatile. The company's raw material cost has increased to 69.9% of sales in CY06 as compared to 65.8% in CY01. With crude prices expected to remain firm going forward, the company might continue to face margin pressure. The company is also facing pressure on the wage cost front, as it will have to fork out higher salaries to prevent rising attrition rates.

What to expect?
At Rs 315, the stock trades at a price to earnings multiple of 7.7 times our estimated CY09E earnings. Given the low bargaining power of the paper business, current margin squeeze and pressure on cash flows, we believe that any significant upside from the current levels would be very limited. There would be upsides to our estimates if the company were to expand its margins significantly and were to also improve its working capital position.

We had recommended a ‘Buy’ on the stock in January 2006 at Rs 310 with target price of 460. Since then, the stock has breached our target and has touched a high of Rs 465, only to fall back to the current levels in line with the overall market sentiment and pressure on its own financial performance. At the current juncture, we recommend a ‘Hold’ on the stock but with a high-risk rating.

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Aug 11, 2020 (Close)


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