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S. Vaidya Nathan

SHAREHOLDERS of Tamil Nadu Newsprint (TNPL) can stay invested despite the sharp run-up in the stock price in the past one month. Straying away from the trends in prices of paper industry stocks that have remained sluggish, the TNPL stock has registered a more-than-50 per cent jump to Rs 42 and subsequently declined to Rs 37. Investors can consider selling when the price rises to the Rs 55-60 range.

The price spurt has been linked to factors, such as possible privatisation of the company. There is also stake reduction that has to be done by Tamil Nadu Government which has been pending for more than four years now. But the privatisation process may take time at the State level. More so with a well-entrenched company such as TNPL.

This prospect, however, need not to be completely taken out of the factor driving the price. Fresh exposures can be avoided at current price levels and considered if the stock declines to the Rs 25-30 band.

The near term upside linked to fundamentals appears to be limited.

But the pulp and paper industry at the global level may have already seen the bottoming out of the downward cycle.

If signs of an economic recovery in the US and Germany take hold, a gradual improvement in paper and newsprint prices cannot be ruled out. Such a development would augur well for TNPL as well as other paper companies that have seen profitability on a tight leash in the last 18 months.

TNPL is among the fundamentally sound companies in the paper sector.

Its capacity at 1,82,500 tonnes gives it scale of operations and is also to be ramped up 25 per cent.

The company is also moving into manufacture of a range of paper products now that has helped it diversify somewhat from its initial focus on newsprint.

As for its financials, the reduction in high cost debt effected in a systematic manner in the last couple of years should provide some relief on interest costs.

This could come in handy in 2001-02 when the industry has been affected by the downtrend in paper and pulp prices. For the October-December quarter, interest costs had declined 23 per cent from Rs 9.37 crore to Rs 7.54 crore. But for fiscal 2001-02, the company may be hard pressed to maintain its earnings at the 2000-01 level of Rs 76.4 crore. In the October-December quarter, despite lower interest costs, post-tax earnings dipped more than 50 per cent and for the nine-month period ending December 2001, stood at Rs 40.63 crore. The TNPL share trades at a price earnings multiple of around 5.5 times its likely 2001-02 earnings per share and is valued at a premium, compared to its peers in the industry.

With capacity expansion without any fresh equity, any improvement in the scale of profits would be good for the stock valuation.

Suitability: The risks associated with the stock are high on account of volatile commodity price trends. Investors should adopt a strategy of profit booking at regular intervals.

A buy-and-hold strategy for the long term may not provide any meaningful returns.

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