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S. Vaidya Nathan

SHAREHOLDERS of Tamil Nadu Newsprint and Papers (TNPL) can stay invested at the current price levels as there could be valuation gains. Investors with a penchant for risk can consider small exposures, especially on any price declines from the current level.

Firm trends in the prices of paper and newsprint, despite a continuing slowdown in the global economy, may help TNPL turn healthy earnings numbers for 2002-03. The loss of production in the October-December 2002 quarter may, however, cap the earnings growth.

There have been indications that global newsprint prices may firm up with producers facing higher costs. Newsprint prices have been caught in a fairly protracted and sharp downside. Even when prices of other varieties of paper started to recover in early 2002, sizeable over-supply and declining demand kept newsprint prices down.

Now the worst appears to be over and newsprint prices at the international level have begun to consolidate. Prices of other varieties of paper have shown a slight weakness after firming up in the last one year or so. But the overall trends from the pulp market point to very limited risks on the downside and one or two possible spikes in prices. Domestic manufacturers have used the firm international price trends to effect three to four rounds of price hikes. The most recent one was effected just about a month back. If the relatively firm trends across categories continue into the next few months, TNPL may benefit with good earnings growth in the first half of fiscal 2003-04.

The risk of a protracted war remains a shadow over the global economy and commodity prices. The increase in fuel prices could have an adverse effect on costs. Due to TNPL's reliance on agri-residues for raw material and its self-sufficiency in power, it may be better placed than most other paper industry majors to ride out any pressures on the cost side.

TNPL's earnings took a knock in the October-December 2002 quarter due to loss of production for 44 machine days due to shutdown for rebuilding. Volumes suffered a 33 per cent decline during this period. Earnings fell 32 per cent to Rs 3 crore from Rs 3.9 crore in the corresponding previous period. Revenues fell 26 per cent.

The company has indicated that the problems have been sorted out and volumes are likely be closer to normal levels in the next two quarters. The benefit of the capacity expansion by 50,000 tonnees from 182,000 tonnes may also get reflected in the revenue and earnings numbers over the next year or two.

The enhanced flexibility in product profile — with close to 85:15 mix in favour of non-newsprint papers and lower cost debt structure — has also helped improve earnings levels in the last year or so. Going forward, these would continue to have a favourable impact.

Suitability: TNPL is suitable for investors with a penchant for higher risks due to the highly cyclical nature of paper prices. Investors should consider profit-booking in the Rs 50-60 range. A buy and hold approach may not deliver value in commodity stocks.

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