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Paper Products: Raw material dampener - Views on News from Equitymaster

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Paper Products: Raw material dampener
Nov 22, 2010

Paper Products Ltd. has announced its 3QCY10 results. The company has reported a 13% YoY growth in sales and 6% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Sales for the company increase by 13.1% YoY during the quarter.
  • Operating (EBITDA) margins for the company fell by 1% during the quarter to end at 9.9%. The fall in operating margins is attributable to higher raw material costs.
  • Net profit fell by 6% YoY during the quarter. This fall comes on the back of lower operating income, increase in depreciation expense and higher effective tax rate.
  • Net profit for 9mCY10 increased by 14.3% YoY while net profit margins remained flat. This performance came on the back of higher extraordinary income from sales of property. When adjusting for this one time gain the net profit fell by 32% YoY.

Rs (m) 3QCY09 3QCY10 Change 9mCY09 9mCY10 Change
Net Sales 1,610 1,821 13.1% 4,527 5,189 14.6%
Expenditure 1,434 1,641 14.4% 3,906 4,645 18.9%
Operating Profit (EBITDA)    176    180 2.0%    621    544 -12.4%
Operating Profit Margin (%) 10.9% 9.9%   13.7% 10.5%  
Other Income     3     4 28.6%   10   10 1.0%
Interest   (3)     2     (2)     4  
Depreciation   77   82 6.9%    229    245 7.3%
Profit before Tax    105   99 -5.0%    405    305 -24.6%
Extraordinary item -   -     -      140  
Tax   22   22 -0.5%    103    101 -2.7%
Profit after Tax   82   77 -6.2%    301    344 14.3%
Net profit margin (%) 5.1% 4.3%   6.7% 6.6%  
No. of Shares (m)   63   63     63   63  
Diluted earnings per share* (x)         6.6  
P/E ratio (x)         9.2  
(*trailing 12 months)

What has driven performance during 3QCY10?
  • 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 3QCY09 3QCY10 9mCY09 9mCY10
    Raw material 67.0% 71.1% 65.4% 69.6%
    Staff 9.0% 8.8% 8.7% 8.7%
    Other expenditure 13.3% 10.9% 12.6% 11.8%

  • Operating income grew by 2% YoY. This was lower than top line growth and was a result of sharp increase in raw material costs. Raw material costs increased by 65.4% YoY during the quarter. However, staff costs and other expenditure both fell as a percentage of sales during the quarter.

  • Net profit margin fell by 0.8% to 4.3% during the quarter. The fall in margins was due to lower operating income, higher interest costs, higher depreciation and increase in effective tax rates. Effective tax rates increased from 21.2% to 22.2% during the quarter.

What we expect?
At a price of Rs 60.9, the stock is trading at 8.4 times our estimated CY12 earnings (RPro subscribers click here). We believe the stock is fairly priced at the current levels.

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