Tamil Nadu News Print Ltd - Initiating Coverage:: Unicon

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

Tamil Nadu News Print Ltd - Initiating Coverage

Tamil Nadu News Print Ltd. (TNPL), promoted by the Govt. of Tamil Nadu, is the world's largest bagasse-based paper manufacturer. It's paper capacity of 4 lakh MT at a single location is the largest integrated facility in India.

Investment Rationale:

Ongoing structural changes to help grow paper consumption in India

At ~9.6kgs per capita consumption, India is one of the lowest paper consuming economies. Structural changes such as growing organised retail, industrial and service sectors, and improvement in living standards will help grow the paper consumption to 8%p.a. in the next few years.

Fewer expansions in the next four years to benefit the paper industry

In the next four years ending FY15, the total additional capacity supplies will be ~1.9 mn MT whereas incremental demand may be over 3.2 mn MT, suggesting a narrower demand supply situation. A favourable scenario is already visible as the paper industry is able to pass on the increased input costs to the consumers starting 2011.

Historical trend suggests TNPL is shielded to a large extent from short-term economic downturn

For TNPL, the impact of slowdown was witnessed in FY10, when YoY average realisations fell by 2.4%. However, EBITDA margins for FY10 improved marginally to 27.4% as against 25.2% in FY09 largely due to reduced input costs. Further, as bagasse is delivered on a barter basis from sugar mills in exchange for supplying steam, TNPL is benefited during the downturn with the reduction of commodity prices such as coal and furnace oil.

Investments to drive both the top and bottom line for TNPL

In Jan 2011, TNPL brought on stream 1,55,000 MT of paper and 80,000 MT of pulp at a total cost of INR10 bn. Further, it is setting up a mini-cement factory, a de-inking facility and an onsite Precipitated Calcium Carbonate (PCC) plant. Once commissioned, these facilities together will add over 3% to EBITDA margins.

Valuation and Outlook

At CMP of INR 117, on relative valuation parameters such as PE and EV/EBITDA, TNPL share is trading at a discount of 12% and 15% respectively to its peer group. Further, TNPL with its industry's highest EBITDA margins coupled with positive industry prospects such as strong growth, sustained higher utilizations and improved pricing power, is best placed to take advantage of any upside re-rating. We initially assign a PE of 6x its FY13E earnings, giving us a target price of INR 161 and an upside potential of 38% in the next 12-18 months. Thus we recommend a BUY on the stock at current levels for decent gains.