The Hindu Business Line : TNPL: Hold

The gradual improvement in paper prices and the enhanced product switching flexibility of the company may provide some room for profit growth in fiscal 2002-03. Fresh exposures can be considered at the Rs 35-40 mark.

The stock's valuation could improve as its performance may sport a better look than in 2001-02. Then its bottomline growth was affected badly by the fall in paper and newsprint prices. This fiscal, domestic companies have managed to effect two rounds of price hikes.

If the gradually recovery in international prices takes firm hold, it may provide a firm undertone to domestic prices as well. But newsprint demand and prices may take longer to recover as the advertisement scenario is expected to be sluggish through 2003-04 as well and recovery expected in the later part of 2004.

But TNPL has developed considerable flexibility in its product portfolio. In 2001-02, the product-mix between newsprint and printing and writing paper was 18:82 against 33:67 in the previous year.

TNPL also plans to move towards a 100 per cent convertibility in 2002-03. There may be room for volume growth in the next two years as the company's capacity expansion is slated to go on stream this fiscal.

This will add 50,000 tonnes to the existing capacity of 1,82,000 tonnes. These factors, coupled with self-sufficiency in power provide TNPL with advantages on the operating cost front. The reduction in the level of debt as well as its composition due to replacement of high cost debt by low cost debt has started to reflect on the bottomline by way of lower interest costs.

As a consequence, the company's comparable post-tax earnings declined 15.2 per cent to Rs 64.82 crore (Rs 76.43 crore in 2000-01) in a year when the prices went through the wringer, especially in the second half of the year. But after providing for deferred tax that was required from 2001-02, reported earnings were at Rs 35.31 crore.

Given the improvement in paper price levels, the company should be in a position to show decent earnings growth in this fiscal. The company has bid for Hindustan Newsprint. If this bid succeeds, it may impose some costs in getting the acquired entity to better operating levels.

Suitability: The TNPL stock is appropriate only for investors with a preference for above average equity risk. Investors will have to look for profit-booking opportunities at the Rs 60-70 levels. A buy-and-hold approach will not pay.

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