TNPL: Hold

Recommendation: Hold

Anup Menon

TRADING at Rs 22, the stock of Tamil Nadu Newsprint and Paper is a good investment option for a portfolio with a medium-to-low risk profile.

The stock trades at a price-earnings multiple of two times its annualised earnings per share. The earnings performance for the quarter-ended 2001 was in line with expectations. Given the weakening paper prices, the road ahead is not all that smooth.

The company is banking on strategies which will help it control costs and, thereby, reduce the impact on bottomlines. On a relative basis, the valuation of the stock looks attractive. However, given the uncertainties prevailing in the market, investors should be cautious. It would be worthwhile to watch the stock closely. Investors can consider taking fresh exposures in the stock at the Rs 17-19 levels and keep a 30-40 per cent price improvement as their exit target.

Click here for Table

Earnings Review: The company's earnings performance for the quarter-ended June 2001 was in line with expectations. Sales revenues fell 0.67 per cent to Rs 128.10 crore compared to the corresponding previous period. In the same time-frame, operating margins were more or less stable at the 30 per cent mark. Post-tax earnings rose 25 per cent to Rs 16.53 crore compared to the corresponding previous period, mainly due to interest cost savings. On an equity base of Rs 69.12 crore, the annualised per share earnings works out to around Rs 9.50.

Facts: TNPL is a leading player in the domestic paper industry. The company has business interests in printing and writing paper. It is one among the most efficient producers in the domestic market. It has an existing capacity of around 180,000 tonnes. The company has plans to augment its capacity by another 50,000 tonnes in the future.

Prospects: Paper prices in both the domestic and international market is a significant factor affecting the fortunes of paper companies. Over the last two quarters, prices have been ruling soft in both the international and domestic market. This is likely to have a negative impact on the bottomline of the company. The question is: Can the impact be softened?

The company has indicated that it plans to keep its costs under check through various measures such as reduction in debt, captive consumption of energy and reducing input costs through import substitution among others. Being one among the most efficient players, these moves should be beneficial for the company in the short to medium term. The results of these moves to some extent should release the pressure on bottomlines.

The company is also keen on keeping its export market intact. For instance, it expects to maintain its export levels of around 25,000 tonnes, which they managed to achieve in the previous year. This indicates that the company is optimistic that the demand situation is not likely to take a major hit on account of the global slowdown.

Overall, growth rates in the near future may not be very high. This trend is likely to continue into the next couple of quarters. Investors with a long investment horizon should look closely at the stock.