Stock Fundamentals

Tamil Nadu Newsprint & Papers Ltd: Worth the paper

Maulik Madhu | Updated on January 16, 2018 Published on October 23, 2016

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Robust demand and cost benefits are positives for this paper major

The stock of Tamil Nadu Newsprint & Papers (TNPL) has gained around 36 per cent since the start of this year. The company’s strong performance in 2015-16, which continued in the latest June quarter too, buoyed the stock.

After the rise, at ₹364, the stock trades at over nine times its trailing 12-month earnings. This is at the higher end of the stock’s three-year historical valuation band of six to 10 times. But given the company’s good prospects, investors can take exposure to the stock.

Poised for growth

India is expected to post strong GDP growth in the current year and the next; this augurs well for the domestic paper industry since consumption of paper is related to economic growth. Rising literacy levels and higher government spending on education are expected to push up paper demand in the coming years despite increasing digitisation.

According to the Indian Agro and Recycled Paper Mills Association, domestic demand for writing and printing paper is expected to grow at 7 per cent in 2016-17. More importantly, with a gradual shift away from the use of plastic and metals as packaging materials to paper, and the increased push from sectors such as e-commerce, logistics and FMCG, demand from the packaging segment too is predicted to grow at a fast pace, for instance at 10-12 per cent in 2016-17.

TNPL, which is among the largest players in the Indian paper industry, is well placed to benefit from this. The company produces uncoated writing and printing paper at its four-lakh-tonne plant in Tamil Nadu.

Besides, it has forayed into the high-growth packaging segment with the setting up of a two-lakh-tonne paperboard manufacturing facility in January 2016, also in Tamil Nadu.

The plant will cater to sectors, such as pharmaceuticals, healthcare, food, cosmetics and other consumer product industries. It rolled out about 25,000 tonnes of paperboard products in the June 2016 quarter.

That apart, the company’s exit from newsprint manufacturing, the ailing segment of the paper industry, since 2008-09 too works in its favour. While cheap imports from China and ASEAN countries have been posing competition, particularly to small players, TNPL has managed to protect its profit margins.

This has been thanks to the technological upgradation and cost-cutting undertaken by large paper manufacturers, such as TNPL. Additionally, unlike many other players facing shortages, TNPL has been on a strong footing on the raw material front.

Adequate raw material

The company has secure supply arrangements for bagasse and hard wood which are pulped for making paper. TNPL uses bagasse, hardwood and waste paper to produce pulp for manufacturing paper and paperboards. It sources bagasse from the state’s sugar mills in exchange for steam under long-term agreements. In addition, tree plantation over one lakh acres of land ensures pulpwood availability to the company. The company has a bagasse and wood pulping capacity of 880 tonnes per day.

Besides, it has a 330 tonnes per day de-inking pulp plant which uses waste paper (domestic and imported) to produce pulp. The company also runs a 104 MW coal-fired power plant, which more than meets its captive requirement. And while the company has benefited from declining international thermal coal prices in the past two financial years, the recent surge in prices could pose a risk. TNPL sources over 95 per cent of its coal requirement through imports.

Financial performance

During 2015-16, TNPL reported revenue of ₹2,418 crore, up 13 per cent from the year-ago period. A nearly 21 per cent (year-on-year) jump in paper sales to over four lakh tonnes during the year helped. This, in turn, boosted operating profit to ₹580 crore (up 15 per cent) and net profit to ₹254 crore (up 52 per cent).

In the June 2016 quarter too, the company posted 17 per cent rise in revenue to ₹756 crore compared with the same period last fiscal.

Operating profit rose to ₹180 crore and net profit to ₹70 crore for the quarter, both around 33 per cent higher than that in the year-ago period. Commissioning of the new plant bumped up fixed costs that chipped away at the net profit.

With the project being largely debt-funded, TNPL’s debt-to-equity ratio rose to 1.7 times as of March 2016 from 0.9 times two years ago. Sale of the better-priced packaging products should however, boost the company’s margins.

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Published on October 23, 2016
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