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Paper Products: High costs affect bottomline - Views on News from Equitymaster

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Paper Products: High costs affect bottomline

Aug 4, 2010

Paper Products Ltd. has announced its 2QCY10 results. The company has reported a 20% YoY growth in sales and 38% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Sales for the company increase by 20% YoY during the quarter.
  • Operating (EBITDA) margins for the company fell by 4.7% during the quarter to end at 9.3%. The fall in operating margins is attributable to higher raw material costs as well as higher other expenditure.
  • Net profit fell by 38% YoY during the quarter. This fall comes on the back of lower operating income, increase in depreciation expense and higher effective tax rate.

Rs (m) 2QCY09 2QCY10 Change 1HCY09 1HCY10
Net Sales 1,470 1,761 19.8% 2,917 3,368
Expenditure 1,265 1,598 26.3% 2,549 3,004
Operating Profit (EBITDA) 205 163 -20.4% 368 364
Operating Profit Margin (%) 14.0% 9.3%   12.6% 10.8%
Other Income 3 3 26.9% 7 7
Interest (6) 1   1 2
Depreciation 77 82 6.5% 75 163
Profit before Tax 137 84 -38.5% 300 206
Extraordinary item - -   - 140
Tax 29 17 -39.6% 81 79
Profit after Tax 108 67 -38.2% 219 267
Net profit margin (%) 7.4% 3.8%   7.5% 7.9%
No. of Shares (m) 63 63   63 63
Diluted earnings per share* (x)         6.7
P/E ratio (x)         9.3
(*trailing 12 months)

What has driven performance during 2QCY10?
  • 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 2QCY09 2QCY10 1HCY09 1HCY10
    Raw material 66.4% 69.7% 64.5% 68.7%
    Staff 9.3% 8.9% 8.5% 8.6%
    Other expenditure 10.6% 12.1% 11.8% 12.3%

  • Operating income fell by 20% during the quarter due to higher raw material and other expenditure. Raw material costs increased by 3.3% while other expenditure increased by 1.5% (both as a percentage of sales).

  • Net profit margin fell by 4.3% to 3.8% during the quarter. The fall in margins was due to lower operating income and higher depreciation costs.

What to expect?
At a price of Rs. 62, the stock is trading at 8.7 times our estimated CY12 earnings (RPro subscribers click Here. We believe the stock is fairly priced at the current levels.

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