CRISIL maintains valuation grade of 2/5 to Rainbow Papers

Rainbow Papers Ltd’s (Rainbow’s) Q4FY12 revenues were higher and EBITDA was lower than CRISIL Research’s expectations due to higher contribution from low-margin trading business. PAT was slightly below expectations due to lower other income. EBITDA margin for the core business improved due to lower raw material costs. PAT margin declined q-o-q due to lower other income and higher taxes. Rainbow’s new capacity for value added paper products is now expected to be operational from Q3FY13 as the commissioning of the captive 20 MW power plant has been delayed by two quarters. According to the management, using power from the grid will not be economically feasible. With all clearances in place, the final phase of the power plant will be completed post monsoon. We expect Rainbow to benefit post the start of production of higher value products from the new capacity. We maintain our fundamental grade of 3/5.

Q4FY12 result analysis
• Revenues were up by 117% y-o-y (38% q-o-q) to Rs 2.2 bn driven by trading revenue of Rs 1,087 mn compared to Rs 502 mn in Q3FY12. Realisation increased by ~5% y-o-y (down 2% q-o-q) to Rs 31.4 per kg. The company sold 35,445 MT of manufactured paper compared to 33,916 MT in Q3FY12 and 34,990 MT in Q4FY11. Revenues, ex-trading business, increased 2.2% q-o-q (~14% y-o-y) to Rs 1,131 mn. The trading business has picked up momentum in the past two quarters as the company is trying to establish a market for the new capacity. Due to the delay in commissioning of the power plant, we expect the trading business to continue up to Q3FY13 until the start of commercial production from its expanded capacity.

• EBITDA margin declined by 279 bps y-o-y (up 82 bps q-o-q) to 16.4% due to higher proportion of revenue from trading, which has ~5-7% gross margins. EBITDA margin for the core business improved to 27.2% from 19.0% in Q3FY12 and 19.2% in Q4FY11 due to lower raw material costs and increase in proportion of sales of higher margin coated paper. Rainbow increased procurement of raw material from local markets instead of importing them as the rupee depreciation increased the cost of imported raw materials.

• PAT margin increased by 54 bps y-o-y (down 233 bps q-o-q) to 5.9%. The q-o-q decline was due to higher taxes paid in this quarter. Rainbow had availed MAT credit in the previous three quarters of FY12 and recognised the deferred tax liability in Q4FY12.

• EPS for Q4FY12 was Rs 1.3 compared to Rs 1.4 in Q3FY12 and Rs 0.6 in Q4FY11.

• Rainbow declared a dividend of Rs 0.4 per share for FY12.

Valuations: Current market price has downside
We continue to use the price-to-earnings ratio method to value Rainbow. Based on our revised estimates, we value Rainbow at Rs 67 per share. At the current market price of Rs 81, the valuation grade is 2/5.

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