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S. Vaidya Nathan

West Coast Paper may manage the Rama Newsprint acquisition comfortably, given the strength in raising fresh equity, possible restructuring of the latter's debt and the firm trends in paper prices, says S. Vaidya Nathan.

Ramping up its presence in the writing/printing paper and newsprint market through acquisition.

SHAREHOLDERS of West Coast Paper can contemplate partial profit-booking in the stock, as the acquisition of Rama Newsprint can slacken earnings growth in the next year or two. The benefits may flow only over a two-three-year period. The debt burden of Rama Newsprint that comes with the acquisition could affect profitability. Over the last 18 months, West Coast Paper too has more than doubled its debt to bankroll its expansion plans.

Acquisiton, a short-term drag

sThe acquisition of Rama Newsprint is a positive from a long-term perspective. But till the debt burden is scaled down, it may weigh on the performance of West Coast Paper, in much the same way the Sinar Mas acquisition affected the performance parameters of Ballarpur Industries. The possibility of fresh equity issuance to cut debt cannot be ruled out.

In this backdrop, partial profit-booking will also enable investors cash in the 110 per cent rise in the stock price in 2003. As the market will price in the effects of Rama Newsprints' performance, the West Coast stock could under-perform pure paper plays such as Tamil Nadu Newsprint and Seshasayee Paper, which suffer no merger/acquisition-related pangs.

However, investors can hold a part of their holdings and also contemplate adding to their exposures at declines of 15-20 per cent for the following reasons: A sharp scaling up of operations due to Rama Newsprint's capacity of 1.5 lakh tonnes; the acquisition of control in it at an attractive price; the likelihood of a restructuring package for its debt; the strong balance-sheet of West Coast Paper and firm trends in paper prices that should ensure healthy profitability and cash flows in 2003-04.

Attractively-priced acquisition

West Coast Paper has cut a good deal by getting a stake of close to 60 per cent for Rs 69.6 crore. The acquisition is subject to the finalisation of a debt-restructuring package. No problems are anticipated on this score.

Debt restructuring and the large size of the unit (with a capacity of 1.5 lakh tonne) are what make this deal attractive for West Coast Paper shareholders.

The benefit of such a large capacity in one location is an advantage that few companies in the paper industry enjoy. The ability to manufacture newsprint and/or writing and printing paper, and use waste paper as raw material is likely to give West Coast Paper operational flexibility. These aspects enhance the value of the acquisition.

Debt recast on

Rama Newsprint has a debt burden of close to Rs 400 crore. With losses rising steadily, its lenders had little choice but to agree to the restructuring. In the April-June quarter, losses at Rs 14.6 crore accounted for about 25 per cent of the revenues. This insipid performance assumes significance as it came in a quarter when newsprint and writing/printing paper prices showed firm trends.

The company in West Coast Paper's hands surely raises their chances of recovering the debt is significantly high. Rama Newsprint's borrowings had been accumulated when interest rates for even top rated borrowers was at least four percentage points higher than the levels that prevail now. The rates for new projects were higher by 1.5-2 percentage points compared to that charged from established borrowers.

With restructuring, West Coast Paper too would be hard-pressed to meet the commitments. So one can expect the lenders as a group to agree to a package, which offers considerable relief on interest rates as well as phased out programme for repayment of principal amounts. If the interest payments are back-ended (where a large proportion is payable in the latter part of the restructured loan period), West Coast Paper would be placed comfortably.

Set for volume growth

Doing this acquisition now when the paper industry is doing well could ease the burden for West Coast Paper. The firm trends in paper prices have now lasted close to 20 months. There are signs that international prices are likely to hold firm over the next two quarters at least.

In FY 2004, the earnings could register a quantum due to higher prices as well as volume growth. The company has stepped up its capacity to 2 lakh tonnes through a Rs 250 crore investment plan financed by internal cash generation and debt. On the expanded capacity, the operating rates are likely to be improve over the next two years, creating room for volume growth.

Improvement in its profitability and earnings levels would enable West Coast Paper to manage the sharp spurt in its own debt burden.

The tax shelter offered by the accumulated losses of Rama Newsprint of about Rs 80 crore may also help reduce the tax outgo for a two-three-year period.

Likely equity expansion

When West Coast Paper embarked on its expansion-cum-modernisation plan of Rs 350 crore, it initially toyed with a rights offer of equity. But it subsequently dropped the plan as internal cash accruals looked up with the rising trend in paper prices.

If Rama Newsprint is eventually merged with West Coast Paper, it could lead to a ballooning of the debt despite the concessions that lenders may allow.

If there is a downturn in the paper industry cycle, handling the debt burden may become tough. In this context, the possibility of an expansion in the equity base cannot be ruled out as this is the only way to cut the debt levels, significantly and quickly.

The strategy of pursuing growth through only internal accruals and debt over the years has left West Coast Paper with considerable flexibility in its financial plans.

Strength in raising fresh equity should stand the company in good stead. However, the equity expansion may not be large enough to dilute the per share earnings significantly.

This, coupled with the strengths of the combined entity, would make West Coast Paper a major player with Ballarpur Industries and Tamil Nadu Newsprint. The stock could be tracked for investment at lower price levels.

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