Stock Pick from Paper & Paper Products Industry

Here Is Why

• Expanding consumption to drive the paper industry.
• OFC segment will contribute 20 per cent in the next two to three years
• Available at reasonable valuation

Growing consumerism, modern retailing, rising literacy (continued government spending on education through the Sarva Shiksha Abhiyan) and the increasing use of documentation will keep the demand for writing and printing paper buoyant. India’s per capita paper consumption is at 9 kg as against 22 kg in Indonesia, 25 kg in Malaysia and 42 kg in China. The global average stands at 58 kg and therefore India’s consumption is indeed quite low. However, things are looking up and the demand is set to rise from the current 13 million tonnes (mt) to an estimated 20 mt by 2020. This indicates that there is a lot of headroom for growth in India. Therefore, we have picked up a stock from this space.

West Coast Paper Mills (WCPM) is engaged in the manufacturing and selling of paper, paper boards and telecommunication cables. The company operates through two business segments: paper and telecommunication cables. In FY15 the company posted gross profit of Rs 126.93 crore (after writing off inter-corporate deposit of Rs 51.60 crore extended to Shree Rama Newsprint and the waiver of interest of Rs 6.81 crore, both totaling Rs 58.41 crore) as against Rs 141.14 crore in the previous year - lower by Rs 14.21 crore (10 per cent) - whereas there was a net profit of Rs 1.11 crore as against Rs 6.63 crore in the previous year. At its operating level, the company reported 16.9 per cent growth at Rs 242.96 crore in FY15 due to its EBITDA margin growing by 114 bps to 14.74.

WCPM is the fifth-largest paper manufacturer in the country and the turnover of the paper division during the year was Rs 1,643.68 crore as against Rs 1,610.74 crore in the previous year (both inclusive of excise duty), i.e. higher by Rs 32.94 crore due to higher sales quantity. The company is also into the manufacturing of optical fiber cables (OFC) which contributed around 6 per cent of FY15 gross revenues. The production and sales of optical fiber cable in terms of quantity was 30,438 km and 30,368 km during the year as against 20,686 km and 21,053 km in the previous year, respectively. 

The sale of optical fiber cable in terms of value was higher at Rs 103.16 crore as against Rs 43.76 crore (both inclusive of excise duty) during the previous year due to execution of more fiber count cable. The company expects to maintain this momentum in FY16 due to large opportunities available in the wake of the National Optical Fiber Network that will help bridge the gap between blocks and panchayats in India. Going forward the OFC segment will contribute 20 per cent in the next two to three years.

At the EBIT level, the OCF business earned Rs 20.51 crore i.e. a 22.3 per cent EBIT margin. On the valuation front, WCPM was trading at P/E ratio of 9.44x with an EPS of Rs 7.98 (excluding exceptional item) in FY15 and in terms of price to book value it trades at 0.84x. We recommend buying the scrip with expectation of 30-35 upside from the current market price in the next one year.