Paper Sector - Finally in the Limelight

The focus on the paper sector was definitely missing. It was there, people knew about its future future prospects, but still it did not interest many. However, the AP Paper and International Paper deal has definitely done the trick. It has helped the paper sector to come in the limelight.

In one of my earlier post, I have analyzed West Coast Paper Mills Limited. I highlighted the huge potential that the paper sector holds. I will list down certain interesting points

• Globally, paper and paperboard consumption is estimated at around 365 million metric tons (MT) and it is expected to increase to 402 million MT by 2012.
• The Asian paper industry is growing at higher rate in comparison with North America and Europe (the market leaders) because of lower manufacturing cost in comparison with Western countries due to lower labour cost.
• The 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.
• India’s per capita consumption of paper and paper products is around 8 kgs as against the world average of 56 kgs.
• Japan has 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.
• Even an increase of 1kg per capita consumption will result in an additional 1.2 million tonnes demand for paper.

Valuation:

International Paper (IP) will buy up to 75% stake in AP Paper Mills for upto $423 million (around Rs. 1860 cr). This is the first major domestic acquisition by a foreign paper company. IP has decided to aquire 53.5% from the company's promoter - LN Bangur for about $257 million in an all cash deal. IP will also make an open offer for the remaining 21.5% promoter holding in the company for $104 million and will pay another $62 million as a non-compete payment to the sellers. This deal is expected to be complete by the third quater of 2011.

AP Paper Mills has two mills with a combined annual capacity of about 250000 tonnes of uncoated freesheet paper. With the deal that has been stuck , you can very well valuate the other paper businesses. West Coast Paper Mills has a total capacity of 320000 tonnes per annum, which can be relatively valued at around 2400 crores on the basis of the AP Paper - IP deal. Compared to this, the current market capitalization of West Coast stands at just around 500 cr, which just shows what huge potential lies in front of it. Even if we take conservative valuation into account, the stock is still undervalued and very attractive. Think about it. You can do your own math and can check it out for yourself.

The reason I chose West Coast from all the paper companies because I really like the company's business model and the various initiatives that it has taken over the years. You can read it in my earlier post.

http://purvismultibaggerstockideas.blogspot.com/2010/07/west-coast-paper-mills-limited-bse-code_26.html

Happy Investing,

Purvi P. Shah