TNPL: Hold/Buy on declines

Recommendation: Hold/Buy on declines

B. Krishnakumar

TAMIL Nadu Newsprint and Papers' performance in the last 15 months has improved on the back of firm trends in prices.

The prices of newsprint and writing and printing paper have shown firm trends since January 1999, up 25 per cent in the last six months. And for the first time since the mid-1990s, the firm trends have lasted for a fairly long period.

Of equal importance is that the outlook for at least the next six months points to a continuation of such trends. At the global level, producers of pulp, paper and newsprint have been able to effect price increases. Unlike the early part of 1999, when inventory build-up was a factor, now, improvement in demand levels seems to be behind the price trends.

The domestic producers with a tariff protection of close to 40 per cent for paper (other than newsprint) have also managed to push through a few rounds of cost hikes. As one of the larger players in the paper industry, TNPL is likely to be among the major beneficiaries.

The company has a capacity of 1,80,000 tonnes per annum (slated to go up to 1,92,000 tonnes). It may well benefit from taking financial charges for the expansion during a period of slowdown. The indicated plans to repay the high-cost debt and the resultant decline in the debt levels may also improve the profitability in the next three quarters of this fiscal.

For 1999-2000, the company reported sales of Rs. 493 crores, operating profit margin of around 25 per cent and post-tax earnings of Rs. 16.30 crores. The company may be able to do better this fiscal, given the price trends. In the first quarter, the company posted profits of Rs. 13.23 crores (1999-2000: Rs. 4.34 crores) on sales of Rs. 128.96 crores (Rs. 107.13 crores).

What could hurt, to some extent, is the change in the excise duty levels. The concessional rate of duty enjoyed by paper manufacturers using non-conventional raw materials (TNPL uses bagasse) is no longer available. The effect of this change may get papered over in the firm price trends, but its impact on profitability cannot be discounted. This factor apart, TNPL appears set to have a good year. The absence of institutional investor interest and the government holding of a sizeable stake may limit any sharp upside. But shareholders can stay invested and capitalise on gains based on improvement in valuation linked to fundamentals. Fresh exposures can be contemplated at declines.