Paper Products: A value proposition

Suresh Krishnamurthy

THE stock of Paper Products is trading at Rs 42.

At this price, the stock is trading at a price to earnings multiple of around five times its earnings for the 12-month period ended March 2001. The stock can be considered attractively valued at the present market price. The dividend payment of Rs 3.50 per share made last year, which has the potential to be at least maintained, is also a positive factor.

Over a medium-term, investments in the stock has the potential to generate decent capital appreciation if the company continues to grow at least in line with that of the economy. However, investors need not hold the stocks with any term perspective in mind. Given the nature of the industry in which the company operates, investors should seek to book profits as and when the stock price exceeds a particular target which can be the level of Rs 60 in the near term.

Suitability: The company can be classified as a small-cap company with a market capitalisation of less than Rs 100 crore. Small-cap stocks can be considered as substantially more riskier than the market average. Generally in any portfolio, it may be better to restrict the exposure to small-cap stocks at a reasonable level considering the risk preference of the investor.

In the particular case of Paper Products, the risk profile can be considered as much lower than that of a typical small-cap company. This is because of the established nature of its operations. Also, the leverage of the company is quite low thanks to the equity offering made to Huhtamaki Van Leer when the company was taken over. Overall, however, the risk is higher than the market average and only investors comfortable with such risks can consider investing in the stock.

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Background: Paper Products, the 51 per cent subsidiary of Huhtamaki Van Leer, a European packaging major, is the leader in the flexible packaging industry in India. It has an established track record over a fairly long period of time.

In the recent past, the company has been facing three strong negative factors that have pulled down profit growth _ strong buyers, fluctuating cost of commodity inputs and substantially under-utilised capacity and, therefore, intense competition. Paper Products association with Huhtamaki Van Leer and its acquisition of an Andhra Pradesh-based packaging unit has not been able to stem the onslaught on profitability. Over a longer period of time, however, the association of the company with a global packaging major and its strong position within the industry would help the company grow at least in line with the growth rate of the country's economy.