The Hindu Business Line : Malu Paper: Avoid

Exposures may be avoided in the initial public offering of Malu Paper, as the scope for appreciation appears limited. We have not factored into our recommendation any gains on listing, which we believe may at best be modest. Malu Paper now plans to more than treble its newsprint capacity to about 70,000 tonnes. The project is likely to be commissioned in April 2007; its effect on revenues and earnings may be reflected in a significant manner only from FY-09 onwards.

There is bound to be a sizeable scaling up of interest burden, as debt levels are likely to rise by more than five fold. If prices turn lacklustre when the new facilities go full throttle two years hence, it will further stretch the payback period for the project. As prices of waste paper — the principal raw material — tend to follow broad trends in the sector, margins may remain at low levels. Limited flexibility in switching between newsprint and writing/printing paper will also add to the risk element. Even a major player such as Tamil Nadu Newsprint has sharply reduced its reliance on newsprint to protect its growth prospects.

Malu Paper has had a fairly satisfactory track record over the past few years. We do, however, believe that profitability is unlikely to rise to levels that will lead to attractive per share earnings on an expanded equity base. Based on likely FY-06 earnings, the offer is stiffly priced and if one adds the risks inherent in the expansion, the asking price seems demanding. Investors can skip this offer, as the opportunity cost is also bound to be high. The lead manager to the offer is Microsec Capital. Malu Paper proposes to raise Rs 25 crore through an offer priced at Rs 30 per share.

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