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

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Paper Products: Marred by slowdown
Jul 30, 2009

Performance summary
  • Economic slowdown and price cuts leads to decline in topline by 9% YoY during 2QCY09. .
  • The operating expenses during 2QCY09 remain flat, while see an improvement of 2.3% YoY for the half year period.
  • Excluding the extraordinary items, the net profits decline by 16% YoY during the quarter.


Financials
Rs (m) 2QCY08 2QCY09 Change 1HCY08 1HCY09 Change
Net Sales 1,619 1,470 -9.2% 3,097 2,917 -5.8%
Expenditure 1,419 1,279 -9.9% 2,700 2,476 -8.3%
Operating Profit (EBDIT) 200 191 -4.5% 397 442 11.3%
Operating Profit Margin (%) 12.3% 13.0%   12.8% 15.1%  
Other Income 5 3 -39.1% 9 7 -14.0%
Interest 3 (6)   (1) 1  
Depreciation 72 77 6.7% 145 152 4.8%
Profit before Tax 130 123 -5.0% 262 297 13.4%
Extraordinary item (72) 13   (87) 3  
Tax 17 29 63.8% 41 81 98.5%
Profit after Tax 40 108 170.4% 134 219 63.2%
Net profit margin (%) 2.5% 7.3%   4.3% 7.5%  
No. of Shares (m) 62.5 62.5   62.5 62.5  
Diluted earnings per share* (x)         4.8  
P/E ratio (x)         10.1  
(*trailing 12 months)

What has driven performance in 2QCY09?
  • Paper Products witnessed a decline of 9% and 6% at the sales level during 2QCY09 and 1HCY09 respectively. This was lead by economic slowdown and price cuts taken by the company in line with the decline in input prices. Lack of bargaining power makes it necessary for the company to take price changes. The company has performed lower than our estimates at the topline front. However, with FMCG sector witnessing strong growth, the demand would pick up.

    Cost break-up
    As a % of net sales 2QCY08 2QCY09 1HCY08 1HCY09
    Total Cost of goods 67.6% 66.4% 67.8% 64.5%
    Staff Cost 8.1% 9.3% 7.6% 8.5%
    Other Expenditure 12.0% 11.2% 11.8% 11.8%

  • The operating margins during 2QCY09 remained flat, while for the half year period saw an improvement of 2.3% YoY. This was mainly on account of lower raw material costs which fell by 10% YoY during 1HCY09. Better product mix and cost efficiencies also aided the expansion. However, higher staff costs (as a percent of sales) restricted the growth to that extent.

  • Excluding the extraordinary items (forex changes and one time staff cost on account of settlement for Nagpur plant), the net profits have declined by 16% YoY during the quarter. Drop in sales and higher taxes has hampered the bottomline performance. On the half yearly basis, the profits are down 2% YoY. The company has done better than our estimates here.

What to expect?
At the current price of Rs 48, the stock is trading at a price to earnings multiple of 6.7 times our CY11 estimates. While the company saw a mixed performance during the quarter, higher margins is a positive sign. Also with the Indian FMCG sector expected to see good growth, the company would benefit going forward. We remain positive considering the importance of its packaging material for FMCG companies and attractive valuation of the stock.

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