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S. Vaidya Nathan

INVESTORS can stay clear of the equity offering of Yash Papers, as returns are unlikely to be commensurate with risks.

A four-fold expansion in equity base, a waiting period of at least two-and-a-half years before the capacity expansion begins to reflect in the earnings, a spurt in debt levels and the risk of the new capacity to go onstream when the paper price cycle is flat or in a declining phase, are likely to cap potential upside.

The offer is at Rs 14 per share. The pricing may appear reasonable on historical parameters; but this would not be relevant, as there is a significant scaling up of equity and debt.

The stock trades at about Rs 20. But it could seek lower levels when the new shares are listed. Even if it settles at levels higher than the offer price, it is, in our view, not reason enough to take exposure. Yash Papers has a fairly impressive track record as a small player in the paper industry. It has handled the ups and downs of the industry life-cycle well with healthy profitability levels.

The company has paid modest dividends of 10-12 per cent over the pasts few years. It has improved the quality of its balance-sheet by paring debt levels. As it operates at about 90 per cent, growth is now linked to gains in paper prices.

In this context, the expansion plan does have the potential to bolster revenues over a three-year period. Now, it is to set up a new capacity of 23,100 tonnes for poster paper.

The facilities are likely to be completed by July 2006. They may start to make a contribution to the earnings only from FY-08. Even then, the sizeable debt burden is likely to weigh on profitability.

The profitability levels would also depend crucially on the stage of the paper industry life-cycle when the new capacities commence operations.

Over the past decade and half, buoyant periods in the paper industry have been short. There is also the threat of imports, as tariffs are further lowered.

These are risks over which the company would have no control. If the industry goes through a difficult phase in the 2007-09 period, it would take a longer time for the investment to pay off.

Even after the expansion, Yash Papers would remain a small player in the Indian context. This aspect too could act to its detriment, as bigger players could wield greater clout over pricing.

Background: The equity base would rise from Rs 3.8 crore to Rs 20.6 crore. The project cost is Rs 85 crore. It proposes to fund about Rs 60 crore vis debt.

The offer, which opened on June 30, closes on July 8. The lead manager is Karvy Investor Servcies. The stock is listed on the Bombay Stock Exchange.

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