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.
