TNPL: Hold/Buy on declines

Recommendation: Hold/buy on declines

Anup Menon

THE STOCK of Tamil Nadu Newsprint and Papers (TNPL) is a good investment proposition for a moderate-to-low risk profile.

Trading at around Rs 40, TNPL trades at a price earnings multiple of 4 times its latest annualised earnings per share. The prospects in the near term looks bright.

The earnings performance in the first half of fiscal 2000-01 has been fairly impressive. This trend is likely to continue into the second half also. The strengthening of paper prices in both the domestic and international markets, coupled with an overall improvement in offtake, has led to improvement in the operating cash flows. Given the present valuations, investors can consider waiting and enter the stock at around Rs 30. Shareholders can stay invested and consider accumulating at declines.

Earnings performance: The company's earnings performance for the first half of fiscal 2000-01 has been fairly impressive. Sales revenues rose by around 18 per cent to around Rs 277.12 crore compared to the corresponding previous period. In the same period, operating margins rose from around 27 per cent to 29 per cent. Post-tax earnings almost trebled to around Rs 33.30 crore. On an equity base of Rs 68.79 crore, the annualised earnings per share work out to around Rs 10.

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Business: TNPL is one of the major players in the domestic paper industry. It was jointly floated by the Government of Tamil Nadu and the Industrial Development Corporation of India (IDBI). The Tamil Nadu Government is a major stakeholder in the company. The company has business interests in manufacturing newsprint and printing/writing paper. TNPL has a capacity of around 1.8 lakh tonnes per annum, and is slated to go up substantially in the near future. With the addition of fresh capacities and its current position in the industry, TNPL is likely to emerge as one of the top five companies in the domestic paper industry.

Prospects: The company's prospects in the near term look bright. TNPL announced investment plans to boost its capacity to around 2.25 lakh tonnes per annum over the next couple of years at Rs 145 crore. Its decision to go through the expansion route rather than the acquisition route augurs well from the strategic perspective. Increasing capacities also means the company will be able to attain higher economies of scale.

The good earnings performance over the last couple of years has helped the company fund expansions through internal accruals. Further, TNPL has also been cutting down its burdens on account of leverage. These factors indicate that there may be a positive impact on the company's financial risk profile.

TNPL uses alternative raw materials such as bagasse instead of wood pulp. The advantages of this has decreased as the concessional rate of duty, given to paper manufacturers, no longer exists. Still the overall cost of production from using bagasse is likely to be lower than wood pulp.

Since paper prices and its offtake continues to remain firm, rising volumes would mean that the decision to increase capacities may ensure the fruitful deployment of good cash flows likely this year and next.

Overall, the company's performance in the near future is likely to be good. The low level of institutional interest and the substantial government stake in the company may hamper valuations to some extent. But investors with a long investment horizon can consider taking fresh exposures.