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Paper Products: Profits up on higher margins - Views on News from Equitymaster

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Paper Products: Profits up on higher margins
May 7, 2009

Performance summary
  • Sharp decline in inventories with clients and sales channels coupled with price reductions leads to a fall in Paper Products’ topline by 2% YoY during the quarter.
  • 390 basis points improvement in the operating margins is seen on account of a 10% YoY decline in the raw material costs.
  • Bottomline reports a 17% YoY growth mainly on account of margin expansion and lower interest costs.

Rs (m) 1QCY08 1QCY09 Change
Net Sales 1,478 1,447 -2.0%
Expenditure 1,281 1,198 -6.4%
Operating Profit (EBDIT) 197 249 26.5%
Operating Profit Margin (%) 13.3% 17.2%  
Other Income 4 5 20.0%
Interest (4) 6
Depreciation 73 75 3.0%
Profit before Tax 132 172 30.5%
Forex gain /loss (14) (10)  
Tax 24 53 123.3%
Profit after Tax 94 110 16.5%
Net profit margin (%) 6.4% 7.6%  
No. of Shares (m) 62.5 62.5  
Diluted earnings per share* (x)   3.7  
P/E ratio (x)   10.9  
(*trailing 12 months)

What has driven performance in 1QCY09?
  • Paper Product topline growth depends largely on volume growth of FMCG companies, which are its main customers. A sharp decline in inventories with its clients and their sales channels coupled with price reductions due to sharp decline in input prices led to a fall in its topline by 2% YoY. FMCG companies have indicated of being cautiously optimistic for the current year as the economic environment continues to remain uncertain. The performance of the packaging major is expected to be along similar lines.

    Cost break-up
    As a % of net sales 2QCY07 2QCY08
    Total Cost of goods 68.0% 62.7%
    Staff Cost 7.1% 7.7%
    Other Expenditure 11.6% 12.4%

  • A 10% YoY decline in raw material costs led to a 390 basis points improvement in the operating margins. Favourable product mix also aided growth. The expansion would have been more, but for higher staff and other expenses as a percent of sales.

  • Inspite of decline in sales, the bottomline reported a 17% YoY growth, mainly on account of margin expansion and lower depriciation costs. While the company has incurred forex losses, excluding that, the net profits have improved by 10% YoY.

What to expect?
At the current price of Rs 40, the stock is trading at a price to earnings multiple of 5.6 times our CY11 estimates. While we have factored in lower growth, given the attractive valuations and the indispensable nature of the business, we still believe it to be a decent medium term bet.

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Nov 20, 2018 01:11 PM


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