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Paper Products: Mixed quarter - Views on News from Equitymaster
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Paper Products: Mixed quarter
Aug 5, 2008

Performance summary
  • Topline grows by 22% YoY in 2QCY08 and 1HCY08.
  • Operating margins improve marginally on account of lower staff and other expenses.
  • Net profits during 2QCY08 reports a jump of 50% YoY, while that in half year period grows by 46% YoY excluding the extraordinary items


Rs (m) 2QCY07 2QCY08 Change 1HCY07 1HCY08 Change
Net Sales 1,413 1,724 22.0% 2,716 3,306 21.8%
Expenditure 1,280 1,556 21.5% 2,444 2,958 21.1%
Operating Profit (EBDIT) 133 168 26.7% 272 348 28.0%
Operating Profit Margin (%) 9.4% 9.7%   10.0% 10.5%  
Other Income 23 22 -5.6% 47 44 -6.0%
Interest 3 3 -5.9% 6 (1) -116.9%
Depreciation 72 72 -0.4% 139 145 4.2%
Profit before Tax 80 115 43.0% 174 248 42.9%
Extraordinary item (25) (59)   (24) (73)  
Tax 16 17 12.3% 32 41 29.4%
Profit after Tax 40 39 -2.0% 118 134 14.1%
Net profit margin (%) 2.8% 2.3%   4.3% 4.1%  
No. of Shares (m) 62.5 62.5   62.5 62.5  
Diluted earnings per share* (x)         4.8  
P/E ratio (x)         8.1  
(*trailing 12 months)

What has driven performance in 2QCY08?
  • With volumes in the FMCG spaces witnessing strong demand, Paper Products continues to be the indirect beneficiary. Further, the company has also taken price hikes, though at lower levels as compared to the increase in raw material prices. Changing product mixes and price hikes led to the topline growth of 22% YoY both in 2QCY08 and 1HCY08. The NASP portfolio is doing well, contributing around 30% to the topline.

    Cost break-up

    As a % of net sales 2QCY07 2QCY08 1HCY07 1HCY08
    Total Cost of goods 71.3% 71.4% 70.8% 71.3%
    Staff Cost 7.9% 7.6% 7.6% 7.1%
    Other Expenditure 11.5% 11.3% 11.5% 11.0%

  • Operating margins for both the periods under consideration has marginally improved on account of lower staff and other costs (both as a percent of sales). However the raw material prices increased by 22% YoY during both the periods on account of rising prices of crude and its derivatives. Further, if we consider the forex transactions (raw materials), the margins have declined to 7.8% (11.3% in 2QCY07) and 9.7% (11.8% in 1HCY07) in 2QCY08 and 1HFY08 respectively. The company however, expects margin pressure in the coming quarter, as the higher prices of crude in the quarter are not fully factored.

  • Net profits during 2QCY08 reported a jump of 50% YoY, while that in half year period grew by 46% YoY excluding the extraordinary items. Extraordinary items include sale of right to receive transferable development rights for vacant land in Thane Plant, forex contract losses and one- time compensation paid on account of closure of Nagpur plant. Lower interest costs and tax outgo also aided the expansion.

What to expect?
At the current price of Rs 39, the stock is trading at a price to earnings multiple of 4.7 times our CY10 estimates. The new Rudrapur plant operated at optimum levels. Further, the reconstruction of the Thane Plant is on going and is expected to commence operations by the end of the current fiscal. Though volume growth would remain strong, the margin would continue to get pressurised. Inspite of improving product mix, lack of bargaining power would affect its performance in the coming quarters.

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