Recommendation from Paper & Forest Products

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

WEST COAST PAPER : PROFITABLE AND GROWTH-ORIENTED

HERE IS WHY
✓Strong demand for products
✓Recent acquisition to add to growth
✓Impressive balance-sheet

The increasing per capita income of India has led to a demand for clean, hygienic and safe products. Consequently, the demand for paper has significantly increased from businesses in organised retail, food outlets, e-commerce and hospitality. Paper has now become a good substitute for poly bags. And looking at the changing trend in the economy, we have identified West Coast Paper Mills as our choice scrip. The company not only has domestic presence but commands a good share in the global market too. West Coast Paper Mills is one of the oldest and the largest producers of paper for printing, writing and packaging in India.

Established in 1955, the mill is located at Dandeli in Uttara Kannada district in Karnataka. The paper produced by the company serves the needs of industries such as printing, writing, publishing, stationary, notebooks and packaging. The company has two different business segments – paper and cable. The paper business contributes up to 94 per cent of the company’s revenue and 6 per cent comes from its cable business. In the paper segment, the company has a manufacturing capacity of 320,000 MTPA. The company has focused on backward integration for its raw material through in-house plantations across 2,463 acres of land which helps improve productivity and profitability.

In FY22, the company procured 100 per cent of its raw material domestically which was 57 per cent in FY18. In the cable segment, the company’s product portfolio includes optical fibre cables, glass roving and FRP ROD cables. The company has a last mile connectivity of broad-gauge railway line on the Miraj-Bangalore section at Alnavar Junction. The company recently acquired Andhra Paper which has a manufacturing capacity of 240,000 MTPA of paper and 181,500 TPA of virgin pulp. It is the only paper mill using virgin pulp in Andhra Pradesh. Through this acquisition the company has consolidated its leadership market position. 

The acquisition is a cost-effective and EPS accretive. Andhra Papers recently signed an MoU with the Government of Andhra Pradesh to invest about ₹2,000 crore to set up a new manufacturing facility to produce 250,000 MTPA of bleached pulp and 238,000 MTPA of paper board at Kadiyam, Rajahmundry, Andhra Pradesh. The revenue of the company has been growing at a three-year CAGR of 20 per cent. The company delivered an operating profit margin of 37.2 per cent in Q3FY23 compared to 29.8 per cent for FY22. The net profit margin was 17 per cent in FY22 and 25.1 per cent in Q3FY23. West Coast Paper delivered strong results in Q3FY23 with an increase of 42 per cent in revenue on YoY basis which stood at ₹1,239 crore while on QoQ basis it increased by 2 per cent.

The operating profit of the company stood at ₹461 crore which increased 26 per cent on YoY basis and 188 per cent on QoQ basis. The stock of the company is currently trading at a TTM PE of 4.21 times, which is much below its long-term average. The company’s return of equity and return on capital employed are at 20.2 per cent and 22.9 per cent, respectively. The company has reserves of about ₹2,225 crore with a strong balancesheet. We expect the company to deliver good results in Q4FY23. It has a strong market position for its products and given the potential growth factors, we recommend BUY.