Paper Products: Hold

Recommendation: Hold

Suresh Krishnamurthy

FRESH investments need not be made in the Paper Products stock that has appreciated 31 per cent since June this year. Given this backdrop, investors who entered the stock then must now look for opportunities to book profits.

Suitability: Investment in stocks with market capitalisation of less than Rs 500 crore comes with high risks. Liquidity is quite low and, consequently, price discovery can be vitiated.

As such, large exposure to such stocks is ill-advised. In the case of Paper Products, daily volumes are in the region of only around 100 shares. Therefore, investments of more than 100 shares come with liquidity risk.

Paper Products is the subsidiary of Huhtamahki Packaging Worldwide. Huhtamaki holds a 51 per cent stake in the company. The support of Huhtamaki augurs well for the company's future prospects. In the quarter ended September 2001, net profits improved 50 per cent on a 9 per cent increase in sales, mainly due to increases in operating efficiencies and lower interest costs.

However, the 50 per cent increase in profits is not sustainable beyond the next two quarters. The large increase in profits can be attributed to the depressed situation in 2000 that reduced the company's profitability. With demand from consumer goods companies improving in the six months ended September 2001, Paper Products - a supplier of packaging materials - improved in financial performance.

However, the industry worldwide is affected by the ability of consumers to squeeze prices. Given this backdrop, large year-on-year increases in profits are unlikely. Even in the next two quarters, profitability may not be as much as it was in the quarter ended September 2001, mainly due to factors of seasonality.

Despite such drawbacks and the 50 per cent rise in stock price in the past five months, it may make sense to hold on to some portion of the investors' holdings. This is because the stock now trades at a price-to-earnings multiple of around five times. The stock's book value at the end of March 2001 is also Rs 110.

Importantly, investors can expect an increase in dividends per share this year. Not only are the profits higher this year, the allocation for preference dividend will be lower since the preference shares have been redeemed. This will ensure that equity shareholders have a higher surplus.

As such, the dividend yield on the stock can be expected to rise. EPS was Rs 3.50 per share for the year ended December 2000. Even at Rs 3.50 per share, the dividend yield works out to a healthy 6.4 per cent based on present market price.

This suggests there is still some upside potential in the stock. Investors can, therefore, start paring exposures when the stock price rises beyond Rs 60 and use stock price increases to exit the stock.