Buy Rainbow Papers; target of Rs 91: SKP Securities

“Rainbow Papers (RPL) is the producer of 186 varieties of paper in India based in Gujarat. The company was focused at industrial paper till date, but after the installing of PM VIII machine, it will also get access to value added papers such as glazed news print and specialty papers. The current capacity of the company is 183,000 MTPA which will get increased to 305,000 MTPA after the above installation. The company not only caters to the domestic markets but also has registered its presence in international markets such as USA, Middle East, South Africa and UK.”

“The paper industry is expected to grow with the CAGR of 11% over next 3-4 years. RPL is undergoing capacity expansion plan to cater the growing demand, with the estimated cost of Rs 6.3 billion. The capex is divided in two phases. Phase - I is already commissioned in FY10. Phase - II with the estimated cost of Rs 3.3 billion is expected to be commissioned by April 2011. RPL will get access to value added papers after completion of Phase - II. EBIDTA and PAT margin is expected to increase to around 24% and 12% respectively with the company now focusing upon value added products. These value added paper enjoys higher realisations as compared to industrial papers. Currently it enjoys the margin of around 22% at EBIDTA levels and 11% at PAT level during 9MFY11.”

“The demand for paper is influenced by various macro-economic factors such as national economic growth, industrial production, promotional expenditure, population growth and the Government’s allocation for the education sector. Domestic demand for paper is expected to grow at a CAGR of 11% in next 3-4 years. RPL would be among the few players in India manufacturing all kind of papers once the PM VIII is commissioned in April 2011. At the current market price of Rs 54, the stock is undervalued based on discounted free cash flow approach. We recommend BUY rating on the stock with a target price of Rs 91/- (68% upside) in 18 months,” says SKP Securities research report.

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