Paper
stocks are back in the reckoning on the back of firm prices and rising demand.
Star Paper, a relatively smaller player, trades cheap compared to its peers and
commands one of the highest margins in the industry. We see debt restructuring,
cost rationalization, volume growth and margin expansion boosting performance.
Company
background
Star
Paper Mills, a GP Goenka group company, is one of the oldest in the paper
business and has been a niche player in the segment. Incorporated in 1936, the
company has consistently outperformed the industry growth rates and has one of
the highest margins in the industry. Star’s only factory is located at
Saharanpur (Uttar Pradesh) and has a capacity of 65,000 tonnes per annum. It has
a 2:1 product mix in industrial and cultural paper. In the industrial paper
segment, the company is operating in niche segments catering to industries like
soaps, laminates, etc. The cultural paper, where it competes with the bigger
paper companies, contributes one third to total revenues. The company has a good
share over the markets in North India and has a strong and loyal customer base
in Shree Krishna Paper Mills, Mastercote, Century Laminating, Green Ply
Laminates and ITC, among others.
Industry
outlook
Domestic
paper sector outlook is bright considering the low per capita consumption around
5 kg per annum, which is below the world average of 54 kg per annum. The
domestic paper demand at around 55 lakh tonnes has grown around 5.5 per cent
CAGR (compounded annual growth rate) over the last five years. The growth rate
in demand is expected to accelerate to 6-7 per cent per annum over the next
two-three years. Supply of paper on the other hand is expected to contract at
around 51 lakh tonnes and is expected to witness lower growth rate of 3-3.5 per
cent per annum on the back of lower capacity additions, leaving a supply gap of
nearly 10 lakh tonnes over the next three years. An expanding economy should
benefit paper firms considering the sheer demand which is likely to accrue to
paper firms in volume terms.
Prices
Paper prices mirror international price trends which in turn
depend on pulp prices. In 2004, international paper prices moved up, resulting
in domestic paper prices rising by about 5 per cent on an average. The increase
was largely driven by rising demand for pulp in US, Europe and China apart from
increasing fuel costs, which surged 30-40 per cent. Internationally pulp (soft
wood) prices moved up 7 per cent last year. However, in the past few months,
global pulp prices have been declining due to higher inventory levels emanating
from increased production. NBSK (Northern Bleached Softwood Kraft - soft wood
pulp which is a benchmark for pulp prices) has declined by 20 per cent to around
$510 per tonne (December 2004). The net capacity in the American paper industry
has declined over the last few years and with a revival in economy there, the
prices should exhibit a firm undertone. The domestic demand for paper is slated
to witness some renewed uptrend in April-March 2005 as corporate results start
pouring in and educational institutes restart. Improved paper prices going
forward are expected to help domestic players including Star Paper get better
realizations and as a result ensure strong profit growth.
Expansion
Star
Paper currently has an installed capacity to produce 64,250 tonnes of paper and
is operating at 100% capacity utilization levels. To leverage on the better
demand conditions, it is undertaken various de-bottlenecking initiatives and
added balancing equipment. During the first phase, it is hiking capacity by
15,000 tonnes which is likely to be completed by the end of 2004-05. By 2005-06
end, Star is expected to increase the capacity to 1,00,000 tonnes. It is also
planning to install a new captive power plant with capacity of 16MW, which will
replace the current DG set and is expected to complete by June 05. Besides it is
also installing a new turbine, a new multi-fuel boiler, retrofit of old turbines
to work at high pressure, increase in pressure rating and capacity increase of
recovery boilers. This combined initiative is expected to result in a cost
saving of Rs 6 crore p.a.
Interim
results on track
Star
Paper Mills ended the third quarter with better numbers as compared with the
same quarter last fiscal. Sales revenue rose 14.19% to Rs 49.32 crore and net
profit surged by 62.06% to Rs 5.51 crore from Rs 43.19 crore, and Rs 3.4 crore,
respectively. Operating profit climbed 23.22% yoy to Rs 11.78 crore. Operating
margins expanded by 175 bps to 23.88% aided by sharp decline in overheads. The
company was able to reduce consumption of electrical power due to which power
& fuel cost declined by 123bps during the quarter. Staff cost also declined
by 101bps as the company is reducing the payroll strength by not replacing
retiring employees. However, 471 bps increase in raw material cost restricted
further margin expansion.
Cost
restructuring
The
company is in the process of restructuring its debt, which will help it to
reduce its debt burden in the next two fiscals. Star Paper has re-negotiated on
high cost borrowings from as high as 20% to 10.25% within a short span of time.
The undergoing expansion may result in debt equity ratio climbing beyond 1:1
which we believe is quite comfortable given the anticipated jump in profits
going forward. It has also optimised the raw material mix leading to a reduction
in raw material cost.
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