Sunday, April 23, 2006


Surprisingly, the paper industry has been an underperformer. It's PE ratio has often been between 5 and 10, which is mighty lower than most other core industries. .. but things are looking better for this industry (story). An 8% growth in GDP means an 8% plausible increase in demand for paper, while the production is expected to grow at only 4%. This would lead to a rise in prices and hence profitability. Also, there will be consolidation in the industry with the smaller players merging with bigger ones (primarily due to the introduction of environmental norms). Players are also getting ready to explore the export market with 10-12% of the produce leaving Indian shores. (This would fuel prices even further)

Lets examine the prospects of a few players -

[1] West Coast Paper Mills Ltd. - The lastest quarterly data pegs the company at 537 crs of sales and 42 crs of profits. At a CMP of 393 (21-Apr), the PE is at 8.37. The company has also indicated an improvement in the net margin owing to cost control measures (and inspite the increase in fuel costs). It's a BUY candidate.

[2] Andhra Pradesh Paper Mills - I bought this a week back at 120 rupees. It's at 140 rupees today (21-Apr). The scrip has a fwdPE of 10.11. A recent report by EmKay Research gives the following cues -
a) Margin will double from 13.5% to 26.2% in the next two years
b) A 125% improvement in PAT over the next two years. In fact at today's price, the research agency estimates the stock to reach a PE of 4.4 by FY2008
c) Sales growth at a CAGR of 15.20%
d) The price target for Andhra Paper Mills is INR 224.00 (an increase of 76% from current levels)

[3] JK Paper - Here's another research report by Religare Securities Ltd. The CMP of JK Paper is 60 and it has a price target of 96 rupees. I'd however, prefer Andhra Paper Mills and West Coast over JK Paper as the company has shown a lack of consistency in profitability (profits went down by 8% last yr and sales were stagnant)

[4] Star Paper - Here's a pick of the week by Star Paper Mills has perhaps the lowest PE valuation in the paper industry ... a fwd PE of just 6.20. The company has shown brillaint improvement in sales with one glitch in the quarter ending Dec-05, where PAT was only 2.40 crs ... a huge reduction over last yr. So any investment in the scrip can be recommended only after checking the Mar-06 results of the company.

So here it is ... divide you paper industry booty equally between West Coast Paper and Andhra Paper Mills. They are a t good valuations, have grwoing sales+profits and good management structures.


Anonymous Anonymous said...

Hi Shankar,

Find this blog while researching on a co. on google finance one weak ealier. I find it very intresting and because of it i have started reading and learning about value investing. I would like to add one more company to your examples for paper is Orient Paper in which i have invested at the level of Rs. 240 - 275. Orient is CKBirla group co. and is also in business of Sugar and Cement apart from Fan and Paper. As i am not very good at fundamental will request you to check for it.

Samir A. Trivedi

3:14 PM  
Blogger Shankar said...

Hi Samir,

I guess you have perfected the art of timing. Post your buying the shares somewhr in the last week of March (i presume), the share has brought returns of 50% plus.

I had researched Orient Paper before and had not bought the same because of the profit levels. From 2001 to 2004, the company was in the red, and closed 2005 with a profit of 2.74 crs. (that's low). However the stock has gained appreciably in the last 3 qtrs with steady increase in sales. If the stock closes at 8cr for the qtr, it's PE would be at 30.46. That's very high for this industry.

It's my gut feel, the stock will tumble down to somewhere close to the 280 mark in the next two weeks.


Warm Rgds,

4:09 PM  
Blogger Prasanth said...


Have you looked at TNPL?



7:52 PM  
Anonymous Anonymous said...

Hi, Shankar

Why i bought this script in first place? Well, There are few reasons to this.

1) I dont go by P/E of the company. I mainly go through charts, where i think i have got good visibility.

2) The company is also in to the Cement with the capacity of 20 lakh MTPA.

3) It is holding the share of Century.

4) There is some real estate which they are thiking to sell.

And i feel that in long term it will touch 500 mark by next month on the basis of the chart.

And I will be happy to buy if its fall at 280 mark :). Somtimes values are hidden in dark shadows.

Samir A. Trivedi

8:13 PM  
Blogger Shankar said...

Hi Prasanth,

I did look at TNPL (I know your love for Chennai and TN). It'ws at a fwdPE of 13.61. Good stock. The others seemed more interesting.

Hi Samir,

Hope the stock reaches 500. At that levels it will be at a fwdPE of 39. Thats a huge 26 numbers more than industry average. Prasanth, what say u?

Warm Rgds

8:58 PM  
Blogger Ravi Purohit said...

hi Shankar,

The only reason I can comprehend for this company's share price to go up is the hiving off of its cement division. The industry is currently undergoing a strong consolidation phase, with Holcim and the Aditya Birla fighting for top honours.

Orient Paper has too many non-related businesses, ie. paper, fans, cement, etc. I think the market is valuing its cement business (at say something like USD 100 per tonne of cement capacity or some such number) more than anything else.

Similar cases can be seen in companies such as Managalam Cement, Andhra Cement (this company posted big declines in sales and profits during the last quesrter. it is and will remain a loss making co. but will soon be sold off, or so i believe). A few more examples would include - Zuari Industries, Saurashtra Cement and Guj. Sidhee Cement.

So I think as long as the cement story remains intact, stocks like Orient Paper would do well. But, once that is out of flavour, Shankar, your concern over its profitabilty and valuations will come into play and the co. could head down south.


7:08 AM  
Anonymous Anonymous said...

Thanks Shakar, Ravi

For giving very good insights on Orient Paper.
One question which still remain intact that in Bull Market By the Book valuation keeps any hold on the MP? If no why always people tend to ride on stories, like the case of Reality stories of Bombay mills? We ever cosider asstes of the co's while valuaing the true value of the assets the compnay hold.?
Ok if we do that then what ONGC is holding as oil assets will valued much more higher. Specially in the time when ONGC is only one company which is doing job looking benefit of the country. Think the scenario that one day suddenly ONGC closed down their shutters. What will be the effects of that Indian Economy.

The Value of such companies are far more then we think. So this companies are always good to hold.


10:21 AM  
Blogger Prasanth said...


I agree with Ravi on this - too many unrelated business. May be the stock is going up because people are thinking that Orient will spin off the cement divison as a seperate entity - you know - flavour of the season - "to unlock Share holder value" !!

BTW, do give me your feedback on the IPCL merger with 6 companies (check my blog).



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