CMP (BSE): 94.80The Indian Paper Industry accounts for about 1.6% of the world’s production of paper and paperboard and there is tremendous scope for growth present in the Indian paper industry. This is due to the fact that India’s per capita consumption of paper and paper products is around 8 kgs as against the world average of 56 kgs. Even an increase of 1kg per capita consumption will result in an additional 1.2 million tonnes demand for paper. With respect to paper consumption, Japan enjoys the highest per capita consumption of over 250 kg in Asia, followed by Singapore of over 145 kg. The developed countries like US, Canada, Germany and UK enjoys higher per capita consumption of 300 kg, 243 kg, 233 kg, and 202 kg respectively.
Hence I believe that there is substantial growth potential left for increasing paper consumption in India. Owing to this fact, the Indian paper industry has witnessed huge investments in last 3 years (2006-09), more than the total investments in the industry from 1960 to 2006. Among the various paper companies the early riser was West Coast Paper Mill Ltd, which is one of India's largest integrated paper and paperboard manufacturing company. In 2006, West Coast Paper Mills sensed both the need to rapidly expand capacity, and the underlying opportunity it presented. They embarked on a journey to add a further 140,000 tonnes to their paper and paperboard capacity with an investment of Rs. 1300 crores. The additional capacity is already on-stream from this year and with this the company manufactures 900 tonnes of paper every day (as against 500 tonnes of paper before expansion). The company has one of the lowest historical capacity costs in the country, their expanded capacities would be highly cost effective and would increase the margins. With an increased capacity of 320,000 tonnes, they now command more than 3% of 10 million tonnes rapidly expanding paper market.
One of the important factor is availability of the raw material. Here the raw material for paper i.e wood, being an agricultural produce, has a limited supply. Add to that, the environmental concerns over deforestation and increased dependence on external parties like farmers for raw material supply. On the whole, cost efficient procurement of raw material has become the biggest challenge in the industry. Hence, in order to ensure sustained supply of low cost raw materials in the future the company has initiated a core plantation program called 'Contract for Farming' within a radius of 250 kms of Dandeli by partnering local farmers.They focused on promoting and using waste/degraded land for hi-tech plantations of pulpwood trees such as Eucalyptus and Acacia. Today, an area of 9100 acres of degraded /wasteland was covered under Core Plantation Scheme. The Company has plans to cover around 1 Lac acres of land under afforestation in a period of 5 to 6 years under Company’s Plantation. The wood from this plantation program is expected to be available from 2012 onwards. This will take care of about 50% of their total requirement of the raw material. Lately, prices of pulp has been rising in the international markets. The per tonne cost of pulp in US has gone from a low of $350 to $970 and is expected to increase further in the coming months. This has led to an increase in prices of paper by Rs. 4000-5000 per tonne.
West Coast Paper has a PE of 5.12 in an industry where the PE is 12.71. Last year, it declared a dividend of 100% (Rs. 2/-) which brings the dividend yield to about 2.22% at the current price. The stock is quoting at a marginal premium at 1.05 times its book value. The EPS for the year 2009-2010 was Rs. 8.80. With the additional capacity, the revenues are going to be a little more than double in 2010-2011. Even the profits are set to double this year. In addition to this, the company has a very small equity (Rs. 12.55 crore). Hence even a small positive news might give very good hefty returns to its shareholders.
Hence I think this is a very good stock for long term and would be a very good buy at around Rs. 80- 85.
Happy Investing.
Hi Purvi,
ReplyDeleteI am Sravan, I'm a Research Associate from Hyderabad, to be frank I never made such reports(I started my career just 1.5 months ago, I'm in training sessions) I think there is a lot to learn from you, firstly, may I know where do you get such info(I tried a lot but I could never get production capacities of companies), can you please give me some inputs on things as such.
My mail id : sravan@invsearch.com, sravan.devata@yahoo.co.in
Hi Sravan,
ReplyDeleteAnnual reports and the newspapers are the best friends of any investor and analyst. You get loads of information in it. As far as annual reports are concerned never skip the management discussion analysis and Directors report in an annual report. Management discussion and analysis section will give you a good view of the sector the company is into.
Apart from that try to link and see the consequences and effects of the various policies, advances in the economy,demand supply, to the various sectors, try to link it to the company you are studying. Try and get a macroeconomic view on the sector the company is into.
And the internet world is huge which bring a HUGE amount of information at your disposal. Try exploring it.
I am putting up the link of the annual report of West Coast Paper Mills. Always read the Annual report religiously. That should help. :-)
http://bseindia.com/bseplus/AnnualReport/500444/5004440310.pdf
If you need any help you can ask me. I would be happy to help.
Enjoy your research...:-)
previously i thought a company can be studied at 1 go now i understood its a continuous process, thats on qualitative part can u tell me anything on quantitative part (now i feel i'm really bad in that part too)
ReplyDeletehttp://sravanresearch.blogspot.com/
I tried something on NTPC(Qualitative analysis), can u plz go through this and give me some inputs, using which i can improve
I've been assigned to work on TATA Global beverages(dis is my 2nd assignment) its almost complete I'll post it day or tomorrow
ReplyDeleteHi Sravan,
ReplyDeleteWell as far as quantitative analysis is concerned, there is no specific rule. If you were to give the financial statements of one particular company to 5 different analyst and ask them to arrive at a fair value of the stock according to them, the values would vary. No two analysts will arrive at the same fair value.
This is because everyone has a different way of looking at things. As far as my analysis is concerned, I always tend to integrate both quantitative analysis to the qualitative analysis. To begin with try and see at the macroeconomic factors. For example, lets consider one macroeconomic factor that the disposable income of people in emerging economies is increasing, like India. The auto sector is on a zoom. New manufacturing facilities are being put up by the international car makers in India. This is already reflected in the auto stocks rallying up. Now try and see which all sectors might be benefited by this trend. The obvious answer is auto ancillaries apart from auto sector. However even auto ancillaries stocks are rallying up. Try and go down a little further. Try and look at what is the feedstock of these auto ancillaries (how auto ancillaries are for autos).
You will see that rubber, carbon black and insoluble sulphur go in lets say tyres. Then try and look at the companies which are into this. Try and compare the companies that are into it. Try doing a peer comparision and try to find out a value buy which has the capability to grow in future. For carbon black I saw phillip carbon was a good pick becuase it dominates the market of carbon black. Its future seems very bright because the huge growing demand of autos is going to trickle down to it in the coming future.
So you will have to link both of them. Just reading newspapers wont help. We being analysts we have to read in between the lines and try and decipher how a particular advancement in the economy can impact the various sectors and the companies within that sector. Try doing that.
I saw your blog. It is good. But somewhere you have entirely skipped the industry analysis. Thats a must. Try to include that in the Tata global analysis when you do it.
I really hope you find this useful. If you fail to understand something you can ask me again and again. I would be happy to help. And keep up the good work on your blog.
hi,
ReplyDeletethanks for dat, and regards dat sectoral part which u mentioned, dats r8 even i felt da same, i was concerned about the space dats it, i will certainly update it.
Previously i used to luk at AR's only for financials but yes there is enough info available in it, nd have to track news too, to find out whether da comp has achieved as mentioned.
Basically for quantitative i am calculating only beta, alpha still dint enter into DCF etc., r8 now working on Dupont analysis I never attended CAFM, FM, SAPM etc relevent classes during my PG, I attended dis intrvw wid little knowledge i've on Project Appraisal(SIP), Market, technical and financials analysis....
during my SIP i calculated r8 from invoices, raw material consumption patterns, production capacity, projections based on capex etc., it was possible to do so as its small one but for the large one's its not possible, so can u tell me as of now where should i start and how to proceed,
and by the way wats da use of calculatin ROCE & ROE(i came across dis tin today, i was calculatin it without knowing y, i felt dats mechanical nd shud be knowin it before i do)
Hey Sravan,
ReplyDeleteThe amount of information that the Annual Reports provide, you cant find it anywhere else.
Well when I look at the financials, there are certain things that I look into. Fore most I look at the capital structure of the company. I like to invest in companies with small equity base. This does not mean that companies with huge equity base are bad. Its just that a small spike in the earnings of a company with a small equity will result in the prices of the stock moving up exponentially. Try to look at the debt equity ratio and the interest coverage ratio. This will help you look at the margin of safety. A high interest coverage ratio is good.
After the capital structure, I look at its earnings capability. I prefer companies which have consistently shown a growth in the earnings and have been able to create value over time for its shareholders. Look at the PE of the stock too. It is said that a low PE stock is good, but this may not be always true. If the PE of a particular stock is low and it has good future prospects and good earning capability, then go for it. It would be a value buy. But if you come across a stock which has a low PE, but the future does not look bright enough, its better ti skip that stock.
Then even try to look at the P/BV ratio. This will help you in determining whether a particular company is undervalued or overvalues.But again don't just consider a company with a less than 1 P/BV stock to be undervalued. Always try and judge a companys value whether it has the capability to earn more in the future or not and then on basis of PE and P/BV try judging a company to be undervalued or overvalued.
Another thing that I use to judge a company whether its overvalued or undervalued is to compare the market capitalization and the sales figures. Its very simple, a company whose worth is Rs 1 but does a business of Rs. 2 is definitely better than a company whose worth is Rs. 2 and does a business of just Rs. 1. I hope you get this.
Then I check out the ratios. The ratios that I look into is the profit margin ratios. High profit margin ratios somewhere depict the superior standing of a company in its sector. I even look at the ROCE and RONW ratios. See that is basically how much are you earning, your returns as the name suggests. As far as ROCE is concerned, it is used to find out the impact of the increase in borrowings of a company on the shareholders earnings. ROCE should always be higher than the rate at which the company borrows, otherwise any increase in borrowing will reduce shareholders' earnings. And RONW is simply how much net profit you are earning on the equity. It determines the profitability of a company after paying off all its debt. Return on networth measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.
And the most important thing is to look at the dividend payout by the company. If the company is earning profits but is not sharing the profits with its shareholders, do look into the reason why so. If the company is in the growth phase and plans to use the retained profits for expansion plans, its good enough as eventually it will all result in increase in the value for the shareholders. But if there are no such plans and the company simply retains all the profits without being accountable for it, its better to skip those stocks. Try and even find out what is the dividend yield of the stocks.
As far as DCF is concerned, I dont do it. It needs a lot of assumptions and estimation, which may not hold true in the future. So I stay away from it. But ya big research houses do employ these techniques. I am sorry I wont be able to help you out in this. But ya I told you about what all I look into the financials. This I hope can help you upto certain extent.
Hi,
ReplyDeletedat will certainly help me a lot, you've almost covered every ratio nd its desc, I'll definitely use this in my quantitative analysis(which r8 now im not doing) just practising on my own.
I'll get back to you if i've any doubts when i implement it. Thanks for da info.