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Paper Products: Growth veiled by onetime gain

Apr 28, 2011

Paper Products Ltd. has announced the first quarter result of the financial year 2010-2011 (1QCY11). The company has reported a 25.3% YoY growth in sales and 27.4% fall in net profits. Here is our analysis of the results.

Performance summary
  • Sales for the company increase by 25.3% YoY during the quarter.
  • Operating (EBITDA) margins for the company increased by 0.9% during the quarter to end at 12.6%. The rise in operating margins is attributable to cost control as higher raw material costs was more than offset by fall in staff costs and other expenditure (all as a percentage of sales).
  • Net profit fell by 27.4% YoY. This fall comes on the back of the absence of one time gain recorded in 1QCY10.

Rs (m) 1QCY10 1QCY11 Change
Net Sales 1,607 2,014 25.3%
Expenditure 1,419 1,761 24.0%
Operating Profit (EBITDA) 188 254 35.0%
Operating Profit Margin (%) 11.7% 12.6%  
Other Income 4 8 140.0%
Interest 1 1 16.7%
Depreciation  82  77 -5.5%
Profit before Tax 108 183 69.2%
Extraordinary item 153 7 -95.5%
Tax  61  45 -26.4%
Profit after Tax 200 145 -27.4%
Net profit margin (%) 12.4% 7.2%  
No. of Shares (m)  63  63  
Diluted earnings per share* (x)   6.8  
P/E ratio (x)   9.7  

What has driven performance during 1QCY11?
  • Sales of the company improved during the quarter on the back of strong demand for packaging from FMCG companies.

    Cost break-up
    As a % of net sales 1QCY10 1QCY11
    Raw material 67.7% 70.4%
    Staff 8.2% 7.0%
    Other expenditure 12.4% 10.0%

  • Operating income grew by 35% YoY. This was faster than top line growth and was a result of lower staff costs and other expenditure (as a percentage of sales). While staff costs grew by 7% YoY, other expenditure grew by 1% YoY. Operating income could have been higher but for higher commodity prices which resulted in a sharp increase of 30% YoY in raw material costs.

  • Net profit margin stood at 7.2% during the quarter vs. 12.4% during the same period last year. This fall in margins was a result of absence of onetime extraordinary income during the current quarter. This onetime extraordinary income was profit booked from the sale of the company’s Nagpur factory. However, higher operating income, fall in depreciation costs and lower effective tax rate helped prop up the bottom line. Depreciation costs fell by 5.5% YoY during the quarter due to lower fixed assets. Effective tax rate fell from 56.5% in 1QCY10 to 24.6% in 1QCY11. When adjusted for profit from sale of Nagpur factory, net profit grew by 141% YoY while net profit margin improved by 3.5% to stand at 7.2%.

What we expect?
At a price of Rs. 66, the stock is trading at 9.2 times our estimated CY13 earnings (RPro subscribers click here). At these price levels we believe that growth for the next 2-3 years is priced in the stock. For this reason we would advise subscribers to be CAUTIOUS on this stock. However, considering that the company failed to display the intended performance over our investment horizon of 2-3 years we discontinue our coverage on the stock.

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