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

CCL Products (India) Limited. BSE Id: 519600 NSE Code: CCL

Given enough Coffee, I could rule the world.

CMP (BSE): Rs. 187

CMP (NSE): Rs. 187.25

Industry: Tea and Coffee

CCL Products (India) Limites (CCLPR) was formed in 1994 and commenced its commercial operations in the year 1995. CCLPR is a profit making, Export Oriented Unit (EOU), with the ability to import green coffee into India from any part of the world, and export the same to any part of the world, free of all duties.

CCLPR is engaged in the manufacture of Soluble Instant Spray Dried Coffee Powder, Spray Dried Agglomerated/ Granulated Coffee, Freeze Dried Coffee, as well as Freeze Concentrated Liquid Coffee. Their soluble instant coffee is prepared from carefully chosen Arabica and Robusta coffee beans, roasted and processed to perfection. In addition to 100% pure soluble instant coffee, they also have the ability to supply flavoured coffee, decaffeinated coffee, organic coffee, Rainforest coffee, Fair Trade coffee, Dual and Triple certified coffee as well as Chicory-coffee mix as per the required specifications of the customer, and can also offer the customers the option of highest quality customised products. CCL Products is also in a position to offer a range of in-house products to its customers.

CCLPR's state-of-the-art Soluble Instant Coffee Manufacturing Plant is located at Duggirala Mandal, Guntur District, Andhra Pradesh, India, with a current combined capacity of more than 20,000 MTs, per annum. CCL Products has the distinction of setting up India’s first Freeze Dried Instant Coffee Manufacturing Plant in the year 2005. CCLPR has adapted Swiss and Brazilian Technology, purchased from world renowned pioneers in turnkey Instant/Soluble Coffee technology at its Plant. This adaptation of technology has enabled CCLPR to produce international quality soluble coffee, which is currently being exported to more than 58 countries around the globe.

Industry Analysis:

Coffee is the most widely consumed drink in the world, with approximately half-a-trillion cups consumed every year. Among all the beverages consumed in India, coffee ranks third, after tea and plain milk. Approximately 90% of world coffee production is represented by the species Coffee Arabica; about 9% by the species Coffee Robusta; with minor production from the species Coffee libericia. The industry can be segmented into filter coffee and instant coffee. The country produces only 4.5% of the world’s coffee, but exports 70-80% of its output. Italy, Russia and Germany are the top three buyers of Indian instant coffee.

India has traditionally been a long known mature market for coffee and a country where Roast & Ground Coffee is a consumers’ preferred choice. But the trends are gradually changing in this fast paced world, with consumers shifting to soluble instant coffee. Within this new increased demand for soluble instant coffee, around two-thirds of soluble instant coffee is being sold as private label coffee. Consumption of soluble instant coffee is on the rise, with growth rates often outstripping those for Roast &Ground Coffee. Consumption is rising not only within the traditional tea-drinking societies of UK, Russia, India and Japan, but also in emerging new markets in Eastern Europe and China. And CCLPR has a state-of-the-art Soluble Instant Coffee manufacturing plant producing almost 20000 MT of coffee every year.

There are several reports available indicating that coffee is a USD 70 billion market per year, globally including USD 9 billion a year in North America alone, yearly. All these and many more, only confirm the belief that the coffee is going to be one of the best markets to invest and reap in the results.

Opportunities for CCLPR:

• The major portion of the soluble coffee is currently being met by the private labels. Since CCLPR is one of the private label soluble coffee provider, the future looks bright for CCLPR in the times to come.
• CCLPR has adopted a business model, wherein the fluctuating prices of green coffee have minimum impact on the sales of the Company. This has been achieved by entering into fixed contracts with customers taking the prevailing green coffee prices at the time of entering into the contract.
• Being the only company in the world to offer all the 4 types of soluble instant coffee from one location, CCLPR has already made its mark in select global markets, for its products, and is now exploring newer markets for all its products.

CCLPR stock is quoting at just 1.25 times its book value. Its PE stands at 9.10 in an industry where the average PE is 13.61. Its market capitalization stands at Rs. 249.43 crore at the current market price. This when compared to CCLPR's expected FY11 sales of Rs. 325- Rs 350 crores, puts CCLPR in a very attractive position. It is a regular dividend paying company and has good dividend history.

It has a very small equity base of just Rs. 13.3 crores. Its reserves stand at Rs. 187.03 crores. Its interest coverage ratio is 3.53, which again puts CCLPR well within the safety zone. The debt equity ratio stands at 0.78 which is fair enough. Its EPS for FY10 was Rs.20.30, while its EPS in the first 3 quaters of FY11 stands at Rs. 18.08 and with one more quater to go, I think it will be definitely better.

In the last one year, the prices of coffee has almost doubled. This has reflected in the rally showcased by Tata Coffee, which will benefit from this price rise to a very large extent. In case of CCLPR, this price rise will not be reflected with huge earnings as it has entered into future contracts where it sells its produce at a predetermined fixed rate. But this increase in coffee price is not just a short term phenomenon. Coffee demand is on a rise and will continue to rise as many predominantly tea drinking populations are slowly shifting to developing the coffee habit. So the future is definitely very bright for the coffee sector and the companies operating in this domain. So sooner or later CCLPR is set to benefit from the surging demand for coffee.

Tata Coffee has had its own share of rally and seems quite overpriced to me. But the rally is still left for CCLPR and at current valuations it seems very attractive. A good long term investment. A good investment would be to buy this stock on dips.

Happy Investing.