Tamil Nadu News Print Limited (TNPL) has significant market share in the printing and writing paper segment. The company is shifting its product mix from newsprint to higher margin segments like copier paper. Additional investments are being made in power, cement and real estate. At a current market price of Rs 106 the company trades at 6.5 times the FY08 EPS of Rs 16 and 4.6 times the expected FY09 EPS of 22. With a dividend yield of 4% TNPL is a safe buy in a volatile market.
The company makes paper from bagasse instead of wood. TNPL is the largest bagasse-based paper producer in the world. It was set up as a joint venture between IDBI and the Tamil Nadu state government.
TNPL is in the middle of capacity expansion at a cost of Rs 1200 crores. The increase in paper manufacturing capacity (from 2, 30,000 tpa to 2,45,000 tpa) and in power generation capacity (from 61.12 MW to 81.12 MW) will be reflected in April 2008. By 2010 the paper capacity will be expanded to 4, 00,000 tpa. The added capacity is for high value products like copier paper which will further increase the profitability. TNPL has gone in for both forward and backward integration (power, pulp).
It generates excess power which is sold externally. TNPL is also setting up a plan to generate cement using the waste product generated during paper manufacture. It is also setting up an IT park in the available surplus land in Chennai. The company is constructing 4.5 lakh square feet of office space there.
The reduction in customs duty and the rupee appreciation will make imports cheaper. Continued availability of bagasse to service the increased capacity is a must. Also the firm is run in a conservative manner adhering to government norms. The company’s debt has more than doubled from Rs 250 crores in 2005 to Rs 550 crores in 2007. This has been done in order to fund the expansion plans. The debt to equity ratio still remains at 0.8.
In the current financial year the firm has expanded their operating margins to 28% ( a rise of 400 basis points). Even with a higher interest burden the net profit margins have increased to 12%. The increased capacity will have a beneficial impact on the top line in FY09. The cement and real estate ventures will be operational in 2009-10.
The company currently trades at Rs 106 with a yearly high/low of Rs 147 /Rs 81. A combination of low business risk, steady management and aggressive expansion plans makes the stock a good buy if you are looking for a steady stock which holds its value in volatile markets.
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