Buy Paper Products; target Rs 89: ABMoney

Aditya Birla Money is bullish on Paper Products (PPL) and has recommended buy rating on the stock with a target price of Rs 89 in its February 08, 2013 research report.

"Paper Products (PPL), net sales for 4QCY12 grew by 4.9% YoY to Rs 2173.6 mn, comprising 2% volume growth and ~3% price growth, which is led by combination of improvement in product mix and price hikes. For CY12, volume grew by ~6% and price/change in product mix led growth was ~4%. Export contributed ~17.6% to the topline in CY12. The deceleration in volume growth is mainly due to corresponding decline in volume growth of underlying FMCG industry from earlier double digit to 5-7%. Management has indicated that inventory correction exercise, in lieu of implementation of standard packaging and declaration norms, has been completed by FMCG players.

Gross margin improved by 130 bps YoY to 30.6% mainly led by benefits of gradual pass-thru of inflationary pressure to the customer in form of price hikes.

Other expenditure increased by 10.3% YoY to Rs 284.6 mn mainly led by increase in power and fuel cost. The increase in power tariffs in company’s operation area coupled with lower supply from grid has led to surge in power cost.

Overall, EBITDA increased by 17.3% YoY to Rs 199.7 mn and EBITDA margin expanded by 100 bps YoY and 210 bps QoQ to 9.2%. Tax rate in 4QCY12 was 32.6% vs 18.9% in 4QCY11. Hence, Adjusted PAT increased marginally by 0.8% YoY to Rs 99.8 mn. The company has declared dividend of Rs  2.6/share.

Acquisition: In Nov12, PPL has recently acquired 51% stake in Webtech Labels Pvt Ltd for consideration of Rs  387.9 mn. The company is into business of manufacturing and selling of various types of labels, used in FMCG and Pharma industry. The company has debt of ~Rs  260 mn and has potential to generate turnover of Rs  750 mn with EBITDA margin of 15%.

Outlook: Volume growth in FMCG industry has tapered down to 5-7% after coming out of high base of double digit volume growth in last 2 yrs. Weak consumer sentiments and high inflationary scenario has impacted volume growth to some extent. With govt making all right kind of noises for taking economy on recovery path, we believe, volume growth in FMCG industry will bounce back in medium term. In short to medium term, we expect volume for PPL to grow inline with the underlying FMCG growth. Hence, in our assumptions, we have conservatively assumed 5% volume growth and 3% pricing growth each in CY13E and CY14E. We have built in EBITDA margin of 9.2% and 9.4% in CY13E and CY14E respectively. We expect Sales, EBITDA and PAT to grow at CAGR of 8.1%, 9.9% and 11.6% during CY12-CY14E period.

Valuations: At CMP, the business is available at P/E ratio of 7.5x CY14E earnings and on P/BV of 1.0x CY14E book. We have valued equity investment in Webtech Labels Pvt Ltd at book value, implying value of Rs  6.2/share. We reiterate our BUY rating on the stock with a rolled over Mar14 price target of Rs 89/share," says Aditya Birla Money research report.

Public holding more than 90% in Indian cos

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