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Paper Products: Decent quarter - Views on News from Equitymaster

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Paper Products: Decent quarter
Apr 24, 2008

Performance summary
  • Topline grows by 21% YoY in 1QCY08
  • Operating margins improve by 0.6% YoY on account of lower staff and other expenses.

  • Improvement in margins and lower depreciation aid the net profit growth of 21% YoY.

Rs (m) 1QCY07 1QCY08 Change
Net Sales 1,303 1,582 21.5%
Expenditure 1,164 1,404 20.6%
Operating Profit (EBDIT) 139 179 28.6%
Operating Profit Margin (%) 10.7% 11.3%  
Other Income 24 7 -69.7%
Interest 3 (4) -268.0%
Depreciation 67 73 9.3%
Profit before Tax 94 117 25.2%
Tax 16 24 46.6%
Profit after Tax 77 94 20.8%
Net profit margin (%) 5.9% 5.9%  
No. of Shares (m) 62.5 62.5  
Diluted earnings per share* (x)   4.8  
P/E ratio (x)   11.2  
(*trailing 12 months)

What has driven performance in 1QCY08?
  • The topline grew by 21.5% YoY in 1QCY08. The shift of preference from rigid packaging to convenience packaging and robust growth in modern retail sales has aided the performance. Its new Rudrapur plant is operating at optimum capacity levels and reconstruction of the Thane plant (affected in Mumbai Floods i2005) is as per schedule and is likely to commence from mid 2008, thus giving a further boost to revenues.

    Cost break-up
    As a % of net sales 1QCY07 1QCY08
    Total Cost of goods 70.4% 71.3%
    Staff Cost 7.4% 6.6%
    Other Expenditure 11.6% 10.8%

  • For the quarter, the margins improved to 11.3% as compared to 10.7% in 1QCY07. High raw material prices and appreciation of Rupee vis a vis US $ has led to margin pressure. However, the higher raw material expenses were offset by lower labour and other expenses. The company is taking steps to counter margin deterioration in the coming quarters.

  • The net profits grew by 21% YoY on account of marginally higher margins and reduced interest. Interest Expense is net of Interest Income of Rs.12 m received during the quarter on Income Tax Refunds. The growth in bottomline would have been higher but for lower other income which was down by 70% YoY. A book loss of Rs.12 m has for mark to market valuation of forex contracts was accounted for in the quarter. The net margins remained stable at 5.9%.

What to expect?
At the current price of Rs 54, the stock is trading at a price to earnings multiple of 6.3 times our CY10 estimates. The company’s performance in the last two quarters has been somewhat enthusing. Though the low bargaining power and higher raw material prices continue to pressurize margins, the management is implementing strategies to counter the deterioration going forward. The NASP (New Application, Structure and Products) would help in offsetting margin loss of its other non-NASP products, where it has a weak pricing power. With PPL's new capacity, we believe that the company’s sales would continue growing, albeit at a slower pace.

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