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Rainbow Papers Ltd (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.
Investment Rationale
Increasing capacity to meet growing demand
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 ` 6.3 bn. The capex is divided in two phases.
Phase – I is already commissioned in FY10.
Phase – II with the estimated cost of ` 3.3 bn is expected to be
commissioned by April 2011.
RPL will get access to value added papers after completion of Phase – II.
Topline to grow at a CAGR of whooping 48% during the next 2-3 years:
Topline of RPL has grown with the CAGR of 23% in the past three years.
It is further expected to grow by 48% in 2-3 years. The demand drivers
are-
Government focus on education;
growing organized retail;
growing middle class – changing lifestyle – creating
demand for consumer durables, FMCG and other
products.
Increasing margins with the focus on value added products:
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.
Outlook & Recommendation
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 ` 54, the stock is undervalued based on discounted
free cash flow approach. We recommend BUY rating on the stock with a target
price of ` 91/- (68% upside) in 18 months.
Investment Rationale
1. Increasing Capacity to meet growing industry demand:
• The current Indian paper industry size is about ` 317 bn which is expected to grow with the
CAGR of around 11% by FY2014-15 to ` 526 bn. The growth will be fuelled by strong
industrial and economic growth.
• WPP is likely to be the largest contributor with the market share of 42% followed by paperboard
at 39%. Demand for WPP segment is expected to rise with the CAGR of 7.6% till FY2014-15 as
compared to CAGR of 6.5% during the last five years.
• Foreseeing the expected growth in the demand in the paper especially in WPP, RPL has planned
to increase its paper capacity from 102,000 MTPA in FY09 to 305,000 MTPA in April 2011.
• The company has imported two paper plants of Voith make from Germany. The estimated cost
of expansion is ` 6.3 bn. The cost includes:
installation of German automated paper machine,
installation of 20 MW thermal power plant,
deinking plant, and
technology upgradation.
• RPL will get access to certain value added products like glazed news print and specialty papers
with the completion of Phase - II.
• Both, Phase - I and Phase - II are funded through debt and internal accruals. Phase I has already
been commissioned. The company has raised GDRs worth ` 1.23 bn and tied up with the
consortium of eight banks for the loan of ` 2 bn and rest from internal accruals, for Phase - II.
2. Topline to grow at a CAGR of whooping 48% during the next three years:
• RPL’s topline has seen handsome CAGR growth of 23% for the past three years. Revenues
posted by the company for FY10 was ` 27.4 bn, which we expect to touch ` 88.9 bn by the end
of FY13 with the CAGR growth rate of 48% due to strong economical and industrial growth.
• The growth will be fuelled by:
Government focus on education:
India has the world’s second largest student population with an estimated student base
of 232 mn in schools and 15.5 mn in colleges. As per BCG Group a global shortage of
56 mn people in the working age group is expected by 2020 due to demographic shifts.
On the contrary, India would have surplus of 47 million working population.
Keeping this in view, Government, both at central and State levels and private sector
are expected to increasingly invest in educational infrastructures in all stages including
schools, higher education institutions and skills development center.
During the 11th Five Year Plan the Government envisaged an outlay of ` 2700 bn
towards the education sector, a four fold increase over the allocation of 10th Five Year
Plan.
Budget 2012 provisions: The Government provided ` 520.6 bn for education sector in
the Budget – 2012. Apart from this it has also proposed to introduce scholarship
scheme to the students of SC/ST appearing in standard IX and X inducing them to
study further.
All these efforts from the Government are expected to boost the demand for WPP
benefiting companies like RPL.
Growing Organized Retail:
The BMI India Retail Report for the first-quarter of 2011 forecasts that total retail sales
will grow from US$ 392.63 billion in 2011 to US$ 674.37 billion by 2014. Strong
underlying economic growth, population expansion, the increasing wealth of
individuals and the rapid construction of organized retail infrastructure are key factors
behind the forecast growth.
There will also be opportunities in India's tier II and III cities with the expanding
middle and upper class consumer base.
According to a report titled 'India Organized Retail Market 2010', published by Knight
Frank India in May 2010 during 2010-12, around 55 mn sq ft of retail space will be
ready in Mumbai, national capital region (NCR), Bengaluru, Kolkata, Chennai,
Hyderabad and Pune. Besides, between 2010 and 2012, the organised retail real estate
stock will grow from the existing 41mn sq ft to 95 mn sq ft.
The increasing penetration of organized retail and the increasing preference for
branded products are fuelling the demand for the products of the company. These
organized retailers use virgin grade packaging boards which stimulate their demand.
Increasing penetration of organized retail also creates demand for thermal paper as
it is widely used by these retailers for billing.
Increasing purchasing power of Indian middle class – creating demand for consumer
durables, FMCG, textiles and so on:
India’s per capita income has increased by 10.5% to ` 44,345 in FY10 from ` 40,141 in
FY09. This growth is the indicative of increased spending power of the consumer. The
levels of aspirations have increased in the today’s youth, with the rising trend of
younger professionals that start earning early in life.
According to a study by the McKinsey Global Institute (MGI), released in May 2007,
India's middle class will swell by more than ten times—from 50 mn in 2007 to 583 mn
people by 2025. By 2025, India will also become the 5th largest consumer market,
moving up from the 12th position it occupied in 2007.
This increasing purchasing power gives rise to the demand for FMCG products and
consumer durables. The Indian FMCG sector, with a market size of US$ 25 billion
(2007–08 retail sales), constitutes 2.15% of India's gross domestic product (GDP).
India is recognized as a cost-effective quality manufacturing base in the world market.
Food products are the largest consumption category in India, accounting for nearly 21
per cent of the country’s GDP. The industry is poised to grow between 10 to 12%
annually.
Demand for FMCG products, consumer durables, textiles etc increases with the
increasing purchasing power of the middle class which in turn creates the demand for
packaging paper such as Kraft paper.
3. Increasing margins with the focus on value added products:
• The revenues of the company are expected to be evenly divided among its industrial paper and
other paper (WPP, News paper and value added paper) segment after the completion of Phase –
II expansion mentioned earlier.
• The company was largely focused upon paper boards for generating revenues prior to this
expansion. The commissioning of PM VIII automated Voith make paper machine will provide
the company the access to number of value added products such as glazed newsprint, light
weighted coated paper, non-carbon paper, thermal paper, coated paper and crepe paper.
5. Near zero wastage of raw material:
• RPL has adopted the policy of near zero wastage of raw material by usage of sludge, plastic
waste and fly ash for manufacturing innovative products having applications in varied
industries.
• Sludge is the semi-solid material leftover of the processed wastepaper. Following is the various
innovative usage of sludge, plastic waste and fly ash:
• The plants for the above products were installed in December 2010. We expect the above
product to contribute around ` 130 mn – ` 140 mn every year to the revenues of the company.
• Such efforts made by the company add to the profitability of the company with marginal
production cost and also eliminates the problem of waste disposal.
Key Concerns
1. Inadequate availability of virgin fiber:
• Availability of virgin fiber is inadequate resulting in high cost of raw materials including wood,
non-wood and waste paper.
• RPL’s performance may suffer due to no availability or inadequacy of waste paper.
2. Price volatility of waste paper:
• As mentioned earlier, waste Paper is the key raw material for the company, 50% of which is to
be imported due to lack of proper collection infrastructure and low per capita consumption in
India.
• This makes RPL exposed not only to freight rate fluctuation risk due to crude oil price
fluctuation but also the currency risk. Any adverse movement in the prices may put negative
impact on the margins of the company.
3. Fragmented Industry – high competition:
• The domestic paper industry is highly fragmented. The estimated number of mills in India varies
between 500 to over 1,000 with small size of paper mills.
• Mills with the capacity of around 7,500 MTPA is considered small mill and the mills with the
capacity of over 33,000 MTPA is considered big mills in India.
• Nearly 45% of paper mill in India are small units which are largely present in lower end of
paper product segments such as unbleached kraft paper, duplex board, creamwove paper and
news print.
• Thus, this makes the competition relatively higher within these products.
4. Substitution Threat:
• Paper competes with the products such as polymers and steel especially in industrial paper
segment. Polymer poses the threat due to its being cheaper in comparison to paper. Its durability
and appearance are also far better than paper.
• Similarly, WPP faces threat with increasing thrust for online storage of data.
Peer Set
• As mentioned earlier, Indian paper industry is the highly fragmented industry with small size of
paper mills.
• The top five paper producers account for 20-23% of market share, approximately. Given below
are brief of some of the prominent organized players in the industry:
Demand for paper and paper products has renewed with the strong rebound of the India and global
economy. Domestic demand for paper is expected to grow with the 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 ` 54, the stock is undervalued based on discounted free cash flow approach.
We recommend BUY rating on the stock with a target price of ` 91/- (68% upside) in 18 months.
Assumed Terminal Year FY20
NOPLAT at Terminal Year (` mn) 1,472.1
Cost of Equity (%) 19%
WACC (%) 9.4%
Discounted Terminal Value (` mn) 6,599.9
Present Value of FCFF till Terminal Year (` mn) 3,438.2
Enterprise Value to Firm (` mn) 10,038.0
Less Debt (` mn) 3,357.7
Add Cash (` mn) 1,215.3
Present Value of Equity (` mn) 7,895.6
No. of Equity Shares (mn) 87.2
Fair Value (`) 90.5
Valuation
Source: SKP Research Desk
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Rainbow Papers Ltd (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.
Investment Rationale
Increasing capacity to meet growing demand
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 ` 6.3 bn. The capex is divided in two phases.
Phase – I is already commissioned in FY10.
Phase – II with the estimated cost of ` 3.3 bn is expected to be
commissioned by April 2011.
RPL will get access to value added papers after completion of Phase – II.
Topline to grow at a CAGR of whooping 48% during the next 2-3 years:
Topline of RPL has grown with the CAGR of 23% in the past three years.
It is further expected to grow by 48% in 2-3 years. The demand drivers
are-
Government focus on education;
growing organized retail;
growing middle class – changing lifestyle – creating
demand for consumer durables, FMCG and other
products.
Increasing margins with the focus on value added products:
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.
Outlook & Recommendation
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 ` 54, the stock is undervalued based on discounted
free cash flow approach. We recommend BUY rating on the stock with a target
price of ` 91/- (68% upside) in 18 months.
Investment Rationale
1. Increasing Capacity to meet growing industry demand:
• The current Indian paper industry size is about ` 317 bn which is expected to grow with the
CAGR of around 11% by FY2014-15 to ` 526 bn. The growth will be fuelled by strong
industrial and economic growth.
• WPP is likely to be the largest contributor with the market share of 42% followed by paperboard
at 39%. Demand for WPP segment is expected to rise with the CAGR of 7.6% till FY2014-15 as
compared to CAGR of 6.5% during the last five years.
• Foreseeing the expected growth in the demand in the paper especially in WPP, RPL has planned
to increase its paper capacity from 102,000 MTPA in FY09 to 305,000 MTPA in April 2011.
• The company has imported two paper plants of Voith make from Germany. The estimated cost
of expansion is ` 6.3 bn. The cost includes:
installation of German automated paper machine,
installation of 20 MW thermal power plant,
deinking plant, and
technology upgradation.
• RPL will get access to certain value added products like glazed news print and specialty papers
with the completion of Phase - II.
• Both, Phase - I and Phase - II are funded through debt and internal accruals. Phase I has already
been commissioned. The company has raised GDRs worth ` 1.23 bn and tied up with the
consortium of eight banks for the loan of ` 2 bn and rest from internal accruals, for Phase - II.
2. Topline to grow at a CAGR of whooping 48% during the next three years:
• RPL’s topline has seen handsome CAGR growth of 23% for the past three years. Revenues
posted by the company for FY10 was ` 27.4 bn, which we expect to touch ` 88.9 bn by the end
of FY13 with the CAGR growth rate of 48% due to strong economical and industrial growth.
• The growth will be fuelled by:
Government focus on education:
India has the world’s second largest student population with an estimated student base
of 232 mn in schools and 15.5 mn in colleges. As per BCG Group a global shortage of
56 mn people in the working age group is expected by 2020 due to demographic shifts.
On the contrary, India would have surplus of 47 million working population.
Keeping this in view, Government, both at central and State levels and private sector
are expected to increasingly invest in educational infrastructures in all stages including
schools, higher education institutions and skills development center.
During the 11th Five Year Plan the Government envisaged an outlay of ` 2700 bn
towards the education sector, a four fold increase over the allocation of 10th Five Year
Plan.
Budget 2012 provisions: The Government provided ` 520.6 bn for education sector in
the Budget – 2012. Apart from this it has also proposed to introduce scholarship
scheme to the students of SC/ST appearing in standard IX and X inducing them to
study further.
All these efforts from the Government are expected to boost the demand for WPP
benefiting companies like RPL.
Growing Organized Retail:
The BMI India Retail Report for the first-quarter of 2011 forecasts that total retail sales
will grow from US$ 392.63 billion in 2011 to US$ 674.37 billion by 2014. Strong
underlying economic growth, population expansion, the increasing wealth of
individuals and the rapid construction of organized retail infrastructure are key factors
behind the forecast growth.
There will also be opportunities in India's tier II and III cities with the expanding
middle and upper class consumer base.
According to a report titled 'India Organized Retail Market 2010', published by Knight
Frank India in May 2010 during 2010-12, around 55 mn sq ft of retail space will be
ready in Mumbai, national capital region (NCR), Bengaluru, Kolkata, Chennai,
Hyderabad and Pune. Besides, between 2010 and 2012, the organised retail real estate
stock will grow from the existing 41mn sq ft to 95 mn sq ft.
The increasing penetration of organized retail and the increasing preference for
branded products are fuelling the demand for the products of the company. These
organized retailers use virgin grade packaging boards which stimulate their demand.
Increasing penetration of organized retail also creates demand for thermal paper as
it is widely used by these retailers for billing.
Increasing purchasing power of Indian middle class – creating demand for consumer
durables, FMCG, textiles and so on:
India’s per capita income has increased by 10.5% to ` 44,345 in FY10 from ` 40,141 in
FY09. This growth is the indicative of increased spending power of the consumer. The
levels of aspirations have increased in the today’s youth, with the rising trend of
younger professionals that start earning early in life.
According to a study by the McKinsey Global Institute (MGI), released in May 2007,
India's middle class will swell by more than ten times—from 50 mn in 2007 to 583 mn
people by 2025. By 2025, India will also become the 5th largest consumer market,
moving up from the 12th position it occupied in 2007.
This increasing purchasing power gives rise to the demand for FMCG products and
consumer durables. The Indian FMCG sector, with a market size of US$ 25 billion
(2007–08 retail sales), constitutes 2.15% of India's gross domestic product (GDP).
India is recognized as a cost-effective quality manufacturing base in the world market.
Food products are the largest consumption category in India, accounting for nearly 21
per cent of the country’s GDP. The industry is poised to grow between 10 to 12%
annually.
Demand for FMCG products, consumer durables, textiles etc increases with the
increasing purchasing power of the middle class which in turn creates the demand for
packaging paper such as Kraft paper.
3. Increasing margins with the focus on value added products:
• The revenues of the company are expected to be evenly divided among its industrial paper and
other paper (WPP, News paper and value added paper) segment after the completion of Phase –
II expansion mentioned earlier.
• The company was largely focused upon paper boards for generating revenues prior to this
expansion. The commissioning of PM VIII automated Voith make paper machine will provide
the company the access to number of value added products such as glazed newsprint, light
weighted coated paper, non-carbon paper, thermal paper, coated paper and crepe paper.
5. Near zero wastage of raw material:
• RPL has adopted the policy of near zero wastage of raw material by usage of sludge, plastic
waste and fly ash for manufacturing innovative products having applications in varied
industries.
• Sludge is the semi-solid material leftover of the processed wastepaper. Following is the various
innovative usage of sludge, plastic waste and fly ash:
• The plants for the above products were installed in December 2010. We expect the above
product to contribute around ` 130 mn – ` 140 mn every year to the revenues of the company.
• Such efforts made by the company add to the profitability of the company with marginal
production cost and also eliminates the problem of waste disposal.
Key Concerns
1. Inadequate availability of virgin fiber:
• Availability of virgin fiber is inadequate resulting in high cost of raw materials including wood,
non-wood and waste paper.
• RPL’s performance may suffer due to no availability or inadequacy of waste paper.
2. Price volatility of waste paper:
• As mentioned earlier, waste Paper is the key raw material for the company, 50% of which is to
be imported due to lack of proper collection infrastructure and low per capita consumption in
India.
• This makes RPL exposed not only to freight rate fluctuation risk due to crude oil price
fluctuation but also the currency risk. Any adverse movement in the prices may put negative
impact on the margins of the company.
3. Fragmented Industry – high competition:
• The domestic paper industry is highly fragmented. The estimated number of mills in India varies
between 500 to over 1,000 with small size of paper mills.
• Mills with the capacity of around 7,500 MTPA is considered small mill and the mills with the
capacity of over 33,000 MTPA is considered big mills in India.
• Nearly 45% of paper mill in India are small units which are largely present in lower end of
paper product segments such as unbleached kraft paper, duplex board, creamwove paper and
news print.
• Thus, this makes the competition relatively higher within these products.
4. Substitution Threat:
• Paper competes with the products such as polymers and steel especially in industrial paper
segment. Polymer poses the threat due to its being cheaper in comparison to paper. Its durability
and appearance are also far better than paper.
• Similarly, WPP faces threat with increasing thrust for online storage of data.
Peer Set
• As mentioned earlier, Indian paper industry is the highly fragmented industry with small size of
paper mills.
• The top five paper producers account for 20-23% of market share, approximately. Given below
are brief of some of the prominent organized players in the industry:
Demand for paper and paper products has renewed with the strong rebound of the India and global
economy. Domestic demand for paper is expected to grow with the 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 ` 54, the stock is undervalued based on discounted free cash flow approach.
We recommend BUY rating on the stock with a target price of ` 91/- (68% upside) in 18 months.
Assumed Terminal Year FY20
NOPLAT at Terminal Year (` mn) 1,472.1
Cost of Equity (%) 19%
WACC (%) 9.4%
Discounted Terminal Value (` mn) 6,599.9
Present Value of FCFF till Terminal Year (` mn) 3,438.2
Enterprise Value to Firm (` mn) 10,038.0
Less Debt (` mn) 3,357.7
Add Cash (` mn) 1,215.3
Present Value of Equity (` mn) 7,895.6
No. of Equity Shares (mn) 87.2
Fair Value (`) 90.5
Valuation
Source: SKP Research Desk
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