Buy : Tamil Nadu Newsprint and Paper Ltd (TNPL) for target of Rs 135

(BSE: 531426 | NSE: TNPL | ISIN: INE107A01015)

Tamil Nadu Newsprint and Paper Ltd (TNPL) posted a 10.2% increase in revenue for FY07 to Rs 854.84 crore, exceeding our target. However, profitability grew only 6.8% to Rs 86.06 crore, which was below expectations. Lower EBIDTA margins in the fourth quarter in the wake of increased raw material prices, higher accounting of depreciation due to few assets being written off restricted the growth of profitability. The company has improved its operational efficiencies moderately during the year. Despite raw material prices remaining firm, TNPL was able to improve its operating margins by 100 basis points. Post the mill development program, which is slated to come on stream by August 2007, we expect significant improvement in the margins in FY08. We reiterate our outperformer rating. At the current price of Rs 93, we believe the stock is available at an attractive valuation with an upside potential of 45% to our target price of Rs 135.

RESULTS HIGHLIGHTS

During the year, the revenue jumped 10.2% revenue to Rs 854.84 crore. This growth was achieved without any addition to production capacity. TNPL achieved 100% capacity utilization, and for the 16th year in a row, posted zero stock of finished goods.

With a conscious shift in product mix, TNPL could increase its average realisation by 8.65% to Rs 35,092 per tonne of paper. This was achieved by reducing newsprint production by 46% to 2,950 tonnes and increased production of copier by 23% to 44,407 tonnes.

TNPL added another 7.5 MW of wind power bringing it to 37.5MW. Mill Development Plan Phase-I is underway as per schedule. It is expected to come on stream in August 2007. The backward integration initiatives taken in phase-I would give a saving of Rs 2250 per tonne and is expected to add Rs 45 crore to the bottom line. TNPL expects to derive the full benefits of phase-I from Sept 2007 onwards.

OTHER DEVELOPMENTS

TNPL has very consciously been shifting its revenue mix from lower-value products like newsprint to higher realization products like copiers. This strategy has benefited the company through increase in its average realisation by Rs 2,795 per tonne of paper. In the phase-II of mill development plan that would increase the paper production capacity of TNPL from 230,000 tonnes per annum (tpa) to 350,000 tpa, a majority of the new addition would be focused on copier production.

In FY07, under the mill development plan, certain assets were written off at their book value. This imposed greater pressure on profitability. Such written off value will be accounted in the depreciation figures of FY07 and FY08 equally.

Paper prices are expected to remain strong. Domestic industry saw a price hike of Rs 750 to 1,000 per tonne in January 2007, the full effect of which would get reflected in FY08. Subsequently prices were again hiked in May 2007 by Rs 750 to Rs 1000 per tonne. TNPL is contemplating a price hike in copier segment by Rs 400 in June 2007. Company is also reviewing its export prices in the light of rupee appreciation and is expecting to increase export prices by $50-60 per tonne by July 2007.

TNPL’s plans to foray into cement production and set up an IT park. It has lined up a capital outlay of Rs 50 crore for the cement plant, of which Rs 15 crore would be from internal accruals and the rest would comprise of borrowings. Post the phase-I of mill development plan, TNPL would be producing 175 tonnes per day of lime sledge on dry basis and 100 tonnesof fly ash per day. Both these by-products would be complimented with gypsum and limestone to produce 400 tonnes per day of cement. The cement plant is expected to commence production from March 2009. The company is expected to
follow the ‘BOOT process’ for setting up the IT park, so as it does not pose pressure on company’s financials. The floor space index of the area is 3. TNPL has a permission to construct 4.5 lakh square feet of office area and 1.5 lakh square feet of parking lot at its unused land in Ambattur, west of Chennai.

VALUATIONS

TNPL is trading at a P/E multiple of 5.51x its FY08E EPS of Rs 16.87. We find these valuations extremely attractive for a company that is likely to record earnings growth of 36% during FY07 FY08E. Moreover, with an EV/EBIDTA at 5.09x in FY08E, current valuations are even more attractive. We rate the stock an outperformer with a price target of Rs 135 over the next 12 to 15 months. Our target price discounts its FY08E EPS of Rs 16.87 by 8x, its historical average.

 

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Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.