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Paper Products: Falling raw material saves the day - Views on News from Equitymaster

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  • Oct 29, 2009 - Paper Products: Falling raw material saves the day

Paper Products: Falling raw material saves the day

Oct 29, 2009

Performance summary
  • Sales for the company declined by 3.2% YoY during the quarter while for 9MCY09 the drop in sales was 4.9% YoY.
  • Operating (EBITDA) margins for the company increased by 0.7% during the quarter to end at 10.7% while the same increased by 2% during 9MCY09 to stand at 13.6%. The increase in margins is attributed to a more favourable product mix and better cost efficiency margins.
  • Net profit margins improved by 2.7% during the quarter to stand at 5.1% while they improved by 3% during 9HCY09 to stand at 6.7%. When adjusted for currency gain/loss, the net profit margins for the quarter improved by 0.5% to stand at 4.9%, while during 9MCY09 the margins improved by 0.6% to stand at 6.5%.

Rs (m) 3QCY08 3QCY09 Change 9MCY08 9MCY09 Change
Net Sales 1,663 1,610 -3.2% 4,760 4,527 -4.9%
Expenditure 1,497 1,438 -3.9% 4,209 3,913 -7.0%
Operating Profit (EBDIT) 166 173 3.7% 550 614 11.6%
Operating Profit Margin (%) 10.0% 10.7%   11.6% 13.6%  
Other Income 4 3 -28.2% 13 10 -17.6%
Interest 7 -3   6 -2  
Depreciation 71 77 8.8% 215 229 6.1%
Profit before Tax 93 101 8.8% 342 398 16.5%
Extraordinary item 32 -4   105 -7  
Tax 21 22 8.3% 61 103 68.4%
Profit after Tax 41 83 102.7% 175 301 72.4%
Net profit margin (%) 2.4% 5.1%   3.7% 6.7%  
No. of Shares (m) 62.7 62.7   62.7 62.7  
Diluted earnings per share* (x)         5.4  
P/E ratio (x)         11.3  
(*trailing 12 months)

What What has driven performance during 3QCY09?
    Cost break-up
    As a % of net sales 3QCY08 3QCY09 9MCY08 9MCY09
    Total Cost of goods 70.64% 66.96% 68.79% 65.41%
    Staff Cost 7.88% 8.99% 7.97% 8.69%
    Other Expenditure 11.48% 13.33% 11.68% 12.35%

  • Operating income grew by 4% YoY during the quarter due to reduction in raw material costs offset by higher staff costs.

  • Net profit grew by 103% YoY during the quarter on the back of higher operating income and lower forex charges. However, when adjusted for forex gain/loss the net profit grew by only 9% YoY during the quarter.

What to expect?
At a price of Rs. 61, the stock is trading at 8.5 times our estimated CY11 earnings. While the company saw decrease in sales, higher margins are a positive sign. As the FMCG sector is expected to see good growth, we remain positive on the company’s growth given the importance of packaging material for FMCG companies. However, on the valuations front, the company looks adequately valued from a medium term perspective.

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