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BILT Vs TN Newsprint: The better investment?

Dec 22, 2011

In our earlier articles we reviewed the business models of Ballarpur Industries and Tamil Nadu Newsprint as well as compared these paper companies based on their financial strengths. In this last article of the series, we will continue with our financial analysis. A final look at the current valuation parameters will help us in decide which paper company is a better stock investment.

Return ratios for players in the paper sector are not that attractive. On an average a paper company earns a return of 9-10% on equity (ROE) and return on capital employed (ROCE). For BILT, in the past decade ROE and ROCE have been close to 12.5% and 11% respectively. TNPL on the other hand has generated better return in the form of ROE equaling 15% and ROCE of 13%.

(Since data for the year 2002 is not available for BILT, we have considered return ratios for the last 9 years instead of last 10 years (a decade) for both the companies.)

Source: Company data

BILT is currently trading at consolidated trailing twelve month (TTM) Price to Earnings ratio (PE) of 6 times and TNPL is trading at TTM PE of 6.7 times. This implies that TNPL and BILT have more or less similar valuations at present.

We observed that even though BILT has had its share of extraordinary growth periods, TNPL has been more or less consistent with its growth. At current price too, TNPL seems to be more fairly valued than BILT. In fact, TNPL has grown quite in line with the GDP of the country. With GDP growth expected to rise in the future, it will be quite challenging for paper companies to match up to the same. Paper stocks are considered to be defensive stocks and demand for paper in all forms will always be there. But, how much would the demand grow with a growing economy remains to be seen.

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