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Paper Products: Mixed quarter - Views on News from Equitymaster
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Paper Products: Mixed quarter
Oct 29, 2008

Performance summary
  • Topline grows by 21% YoY each in 2QCY08 and 1HCY08.
  • On account of higher raw material costs (as a percent of sales) the margins decline by 1.2% and 0.3% respectively for both the periods under consideration.
  • Net profits during 3QCY08 decline by 47% YoY. Lower margins coupled with lower other income and higher tax outgo contribute to the fall.


Rs (m) 3QCY07 3QCY08 Change 9mCY07 9mCY08 Change
Net Sales 1,486 1,793 20.6% 4,242 5,148 21.3%
Expenditure 1,331 1,627 22.2% 3,775 4,598 21.8%
Operating Profit (EBDIT) 155 166 6.6% 468 550 17.6%
Operating Profit Margin (%) 10.5% 9.2%   11.0% 10.7%  
Other Income 1 (28)   14 (93)  
Interest 5 7 39.6% 11 6 -46.2%
Depreciation 75 71 -5.2% 213 215 0.9%
Profit before Tax 77 60 -21.7% 258 236 -8.5%
Extraordinary item - -   (32) -  
Tax 3 21 688.5% 34 61 79.5%
Profit after Tax 75 40 -46.5% 192 175 -9.0%
Net profit margin (%) 5.0% 2.2%   3.4%  
No. of Shares (m) 62.5 62.5   62.5 62.5  
Diluted earnings per share* (x)         4.3  
P/E ratio (x)         5.9  

What has driven performance in 3QCY08?
  • The topline for 3QCY08 and 9mCY08 witnessed a 21% YoY growth. The strong growth can be gauged by the fact that the FMCG sector is witnessing robust volume sales. Packaging being an indirect beneficiary, Paper product stands to gain. The new Rudrapur plant is operating at optimum capacity levels. Reconstruction of the Thane Plant is on going and relocation of operations in a phased manner is progressing as per schedule. The company has outperformed our CY08 estimates by 4.8%.

  • On account of higher raw material costs (as a percent of sales) the margins declined by 1.2% and 0.3% respectively for both the periods under consideration. Polymer based plastic films are the main raw materials used for manufacturing packaging films by the company. These plastic films are linked with the crude prices that continue to be volatile. Further, the company also lacks bargaining power and hence the pressure has continued.

  • Net profits during 3QCY08 declined by 47% YoY. Lower margins coupled with lower other income and higher tax outgo led to the decline. The company had a forex loss of Rs 31.8 m (including Rs 5.3 m booked as a mark to market loss on valuation of forex contracts). For 9mCY08, the profits, excluding the extraordinary item (excise duty provision), declined by 22% YoY. It suffered losses to the tune of Rs 1.1 bn during the nine-month period on account of currency fluctuations.

What to expect?
At the current price of Rs 25, the stock is trading at a price to earnings multiple of 3.0 times our CY10 estimates. The company has outperformed our estimates on the topline front. PPL is the largest organized player with a market share of around 65% of the consumer packaging and labeling segment and hence stands to gain. With PPL's new capacity, we believe that the company will be in a position to grow its topline at a CAGR of 13% in the next three years. While operating margins continue to worry, we believe that competitive pressures in the domestic market are likely to make PPL look at volume growth as a key business driver and not depend on pricing power alone. We had given a Hold on the stock in April 2008. Since then the stock has declined 52%, making it further attractive at the current juncture.

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