The Hindu Business Line : Tamil Nadu Newsprint: Buy

EXPOSURE can be considered in Tamil Nadu Newsprint and Papers Ltd (TNPL), as it appears well placed to post robust growth in revenues and earnings over the next year or two on the back of price stability at higher levels and volume growth. There are also likely to be benefits of lower costs, driven by the company's push for greater operating efficiencies and availability of captive power that will take care of expanding requirements.

The stock trades at less than 10 times its likely earnings for FY-06 and is more attractively valued from a longer-term perspective. The stock has been a notable laggard in the bull market since 2003. This could change, as the performance has taken a turn for the better this year. It may not offer blockbuster returns witnessed in sectors such as engineering and construction, but could provide steady returns; as broad market returns are likely to be moderate, TNPL could be an outperformer.

Without no constraints on capacity and water availability, Tamil Nadu Newsprint is unlikely to face the situation of 2004-05 when it had to make an extended shutdown. Availability of bagasse could, however, pose a problem if the cane crop has suffered extensive damage in the rains over the past couple of months in Tamil Nadu. This is not likely to be a major negative, as the company has the flexibility to operate on wood pulp. Margins may slip slightly, with pulp prices firming up. As more capacities for hardwood pulp are likely to be commissioned next year, pressures on this front could ease and provide producers such as TNPL greater leeway in operations.

The company has shifted to printing and writing paper to steer clear of the pressures in the newsprint market and derives about 95 per cent of revenues from the former segment. It has also managed to make a mark in the branded products segment. Come 2007, the benefits of the expansion-cum-modernisation plan are likely to be reflected in the revenues and earnings.

The company has embarked on a substantial expansion of its pulp capacity and will also expand paper capacity by six per cent to 2.45 lakh tonnes. This will ensure that capacity is not a constraint for at least the next two years. More important, this exercise will make it an environment-friendly unit and ease up pressures on that score.

The expansion is to be financed by cash flows from operations and debt. TNPL is well placed on this score. The rise in interest cost is likely to be largely neutralised by the gains in profitability. The stock trades at a dividend yield of 3 per cent. The downside risks appear modest. Buy with a one/two-year perspective.

The principal risks to our recommendation will be an adverse price cycle when the expansion-cum-modernisation plans go on stream, over the longer term, and pressures of rising energy and raw material costs, in the near term.

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