The Hindu Business Line : Sree Sakthi Paper Mills: Invest

INVESTORS with a two/three-year perspective can consider exposure in Sree Sakthi Paper Mills, as there is scope for a substantial scaling up of revenues and earnings.

In the packaging paper business, growth prospects for higher-quality varieties appear bright; by upgrading and expanding its facility, the company will be well-placed to cash in on the opportunity. The offer is priced at Rs 30 per share.

We expect the stock to list with moderate gains at best; we have not factored in this element in our recommendation.

The principal risks to our recommendation are a delay in commissioning of the new plant and an adverse price cycle when the expanded capacities go on stream.

It will have a market cap of about Rs 50 crore and, as a small-cap stock, price trends could be subject to a high degree of volatility. Sree Sakthi Paper makes paper grades used for packaging a wide range of products. It has a small capacity of about 40,000 tonnes.

The company has expanded its capacity in phases using debt and cash from operations. The effects of its most recent expansion by about 9,000 tonnes will be fully reflected in FY-07's performance.

Through different phases of the business cycle, the company has pursued its modest growth ambitions and managed to report a satisfactory performance.

With the proposed plant, the company will be in a position to cater to demand for higher quality paper for packaging.

Given the growth in consumer products sector and the increasing preference for quality packaging, demand is unlikely to be a problem.

The company has, in the past, shown the ability to scale-up operations to full capacity within a short period from commissioning of expanded facilities.

It has an encouraging customer profile. These factors assume importance, as Sree Sakthi Paper embarks on its biggest expansion ever. The company's capacities are slated to rise by 75 per cent and even at 70,000 tonnes, it will remain one of smaller players in the paper industry.

Within the category of packaging paper, it is, however, likely to emerge as one of the more prominent players along with South India Paper. ITC, of course, operates in a different league and segment.

The new facilities are to be commissioned in December this year and are likely to contribute to revenues and earnings only from FY-08 onwards.

A likely reduction in interest cost due to repayment of high-cost loans, availability of captive power and improvement in operating efficiencies due to upgradation of the manufacturing facilities are also likely to contribute to an improvement in profitability levels.

Earnings growth is, however, likely to provide a support to the expanded equity only from FY-08.

The stock is likely to command a single-digit price earnings multiple. At Rs 30, the pricing is stiff on existing earnings levels and could limit the scope for gains in the near term.

Over a two-year period, returns are likely to be commensurate with risks. This small-cap stock holds the potential to provide capital appreciation, though returns are unlikely to be of the spectacular kind that investors have secured in a swathe of stocks in the ongoing bull market.

Offer details: Sree Sakthi Paper plans to raise Rs 25 crore by offering 83-lakh shares at Rs 30.

The equity base will increase from Rs 8.1 crore to Rs 16.4 crore. The offer opens for subscription on January 17 and closes on January 21. The lead manager is Keynote Corporate Services.