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S. Vaidya Nathan

West Coast Paper: Hold/buy on declines Seshasayee Paper: Hold/buy on declines Tamil Nadu Newsprint: Hold/buy on declines Ballarpur Industries: Book profits and reenter at lower levels J K Paper and The A.P. Paper: Hold

THE stock prices of most paper companies have more than doubled this year. There may, however, be room for further appreciation if the expected improvements in paper prices over the next two years fall in place. Incremental exposures can be considered on price weakness, especially linked to any correction in the broad markets. Paper industry stocks are suitable for investors who have a penchant for higher risk, and would also actively cut exposures to capitalise on price spurts.

The recommendation on Ballarpur Industries is on a different footing. As the largest in terms of capacity, any price improvements would bestow it with gains of a higher magnitude than the rest.

But there are two pegs that could have a bearing on the valuation of the stock: One, the more-than-two-fold expansion in equity following a rights offer last year is now likely to be magnified by the issue of shares and convertible bonds in the overseas markets.

The equity base could touch about Rs 200 crore when these bonds are converted. Earnings expansion is unlikely to support the quantum leap in equity; two, its profitability and earnings growth is likely to be affected by the Sinar Mas unit. The effect may, however, not be as pronounced as in FY 03 if BILT cuts the debt burden using GDR funds.

We still feel that the stock could under perform the other major players in a bullish phase over the next year or two and miss out to a large extent on the gradual revival in the paper industry business cycle. But from a long-term perspective, BILT is a stock that needs to be watched. Shareholders, especially those who had picked up the rights offer of shares at Rs 32 per share, can contemplate profit booking and re-entry at lower levels.

From among the others, West Coast Paper and Tamilnadu Newsprint (its reliance on newsprint, which has seen the weakest price trends amongst paper categories, has declined steadily over the years) appear to be the better options. Shareholders of Seshasayee Paper can retain their holdings as its earnings card may show the benefits of capacity expansion and modernisation. JK Paper is likely to benefit from the industry trends, though management concerns remain.

West Coast Paper may, for a brief period, be hamstrung by its takeover of Rama Newsprint and its likely merger at a later date. The merger is likely to be on terms favourable to West Coast Paper. The latter's financial flexibility in sourcing equity, if needed, and ability to raise funds at fine rates may quicken the process of absorbing Rama Newsprint. Its track record in difficult periods of the industry cycle is also a key positive factor.

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