Company Report | Stock Idea

LONG TERM INVESTMENT CALL

West Coast Paper Mills Ltd. 29 March 2011 BUY

Industry Paper & Paperboard West Coast Paper Mills Ltd (WCPM) is the fifth largest paper manufacturer in
CMP (INR) 77 the country with an annual paper production capacity of 315,000 MT. Besides,
Target (INR) 95 a small portion of its revenues come from manufacturing of Optical Fiber Cables
Upside (%) 24% (OFC) for the telecom industry.
52 week High/Low (INR) 112/55
Market Cap (INR MN) 4785
3M Avg. Daily Volumes 70,085 Investment Rationale
P/E (FY12E) 5x
Expanding paper consumption to drive the paper industry
INR mn
Key Financials FY09 FY10 FY11E FY12E Paper industry is estimated to witness a CAGR of 8% with the total paper
Net Sales 6239 10156 11799 12671 consumption touching 10.7 mn tonnes by FY12. Paper consumption in India is
EBITDA 1111 2387 2815 2931 largely driven by industrial growth, improving living standards, growing
EBITDA margins (%) 17.8 23.5 23.9 23.1 organised retail and service sectors, government thrust on education and low
Adj Net Profit 547 902 1127 1259
per capita paper consumption.
Net Profit margins (%) 8.8 8.9 9.6 9.9
Adj. EPS 8.7 14.4 15.9 17.8
Paper prices to remain firm due to demand supply gap

As only few companies have expansion plans in the next two years, total
Shareholding Pattern (%) capacity additions by the end of FY12 would be ~1 mn or 10% of the present
capacity. With few additions and growing demand, utilisations may touch 100%
by FY12 which in turn can result in improved pricing power for paper
Others, 41.1 Promoters, 51.8 manufacturers.

Institutions, 7.1 New paper capacity to drive the top line for WCPM

A 75% jump in its total capacity in the recent expansion along with expected
strong demand scenario going forward, we project WCPM paper volumes to
grow by 52.4% and 13.1% in FY11 and FY12 respectively. This provides visiblity
Stock Performance (Last one year) of higher revenue, going forward.
WCPM NSE Nifty
120
Cost savings would lead to better EBITDA margins
100

The recent expansion and shift to pulp manufacturing process is likely to add
80
~4% to EBITDA margins. Further, lower dependence on pulp from outside, would
assure availability. In addition, transportation costs (15% of total costs) would
60
gradually reduce over the next 5 years through contract farming.
40
Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb

Source: Ace Equity, Unicon Research Outlook & Valuation

With higher utilisation levels ~95%, we estimate a revenue and EPS CAGR of
26.6% and 26.8% respectively for the three year period ending FY13.
At the current market price, WCPM investment value in Rama Newsprint &
Papers Ltd. (RNPL), a listed company, works out to INR 8 per share. In view of
the above points, we value WCPM at 6x its FY12e EPS and a target price of INR
95.4, giving an upside potential of 23.9% from current levels. Thus we recommend
Analysts: Buy on the stock for decent gains in the next 12 months.
Ravikanth Kanamarlapudi |
kanamarlapudi.ravikanth@uniconindia.in

1
Wealth Research, Unicon Financial Intermediaries Pvt Ltd.
Email: wealthresearch@uniconindia.in
 West Coast Paper Mills Ltd.

Company Description

WCPM is one of the leading integrated paper manufacturers and has the one of
Segment revenue break-up
the largest plant located at a single location in the country at Dandeli in
Paper Telecom Cable Wind Mill
Karnataka. It is the flagship company of SK Bangur Group, which has a group
0.1% 0.1% turnover of USD 375 mn. Its manufacturing facilities are spread over 240 acres
100.0%
in close proximity to river Kali. WCPM started with an initial paper
98.0% 6.5% 5.7%
96.0%
manufacturing capacity of 18,000MT in 1959 which has grown to 315,000 MT
94.0% by May 2010. To ensure uninterrupted power supply for its pulp and paper
93.4% 94.2%
92.0% facilities and to cut down on power costs, WCPM has installed a captive power
90.0% plant with a total capacity of 83MW. It has also installed 1.75MW of wind power
FY09 FY10
which is sold to the grid.

WCPM manufactures paper catering to different industry segments. It produces

uncoated paper largely used in commercial printing, note books and computer
stationery; surface size copier papers, speciality paper such as MICR cheque
paper and security paper; and industrial packaging paper such as coated duplex
boards for food, garments and pharmaceuticals industries.

For raw material, WCPM is primarily dependent on hard wood sourced from
the states of Karnataka, Andhra Pradesh, Tamil Nadu and Mahrashtra. It has
already made arrangements for the required additional quantity of wood with
the increased capacity.

Recently, WCPM got accredited with Forest Stewardship Council (FSC) to use
FSC Pure, FSC Mixed, FSC Recycled and FSC Controlled Wood on its products.
The certificate establishes that raw material sourcing is done from sources that
are not damaging the environment. This accreditation is widely recognised and
will help WCPM in tapping the developed market for branded copier products.

WCPM is also into manufacturing of Optical Fibre Cables (OFC) with a capacity
of 83,500kms. Though this division is in profits, the utilisation levels continued
to stay at ~20% and contribute ~8% of FY10 net revenues. As the OFC industry
is not expecting any capacity additions, WCPM expects the utilisation levels to
improve in FY11 with the increasing demand from Cable TV, broad band services
and inter-connection of networks.

WCPM holds 36.32% in RNPL with a total investment of INR 454 mn. RNPL is
a leading newsprint manufacturer based in Gujarat with an installed capacity
of 132,000 MT.

2
Wealth Research, Unicon Financial Intermediaries Pvt Ltd.
Email: wealthresearch@uniconindia.in
 West Coast Paper Mills Ltd.
Industry Overview

Indian paper industry is highly fragmented with 656 mills established across
Segmentwise India's paper consumption
India. The large integrated players with above 100 MT per day capacity constitute
Speciality
News Paper, 5.0% only 32% of the total capacity, suggesting a highly competitive nature of the
Print, 15.0% industry. The small mills which constitute for 34% of the installed capacity are
Industrial
Paper, 50.0%
largely present in lower end of the product segments such as kraft paper and
WPP, 30.0%
news print.

The Indian paper industry can be broadly segregated into Writing and Printing
Paper (WPP), Industrial Paper (IP), News Print (NP) and Speciality Paper (SP).
Of these, IP segment accounts for ~50% of the total paper demand. It is largely
driven by the industrial demand for corrugated boxes made of kraft paper. WPP
segment which constitute creamwove, maplitho, coated and branded paper
account for ~30% of the total demand.

Indian paper industry is running at a capacity utilisation As per the Associated Chambers of Commerce and Industry of India
of ~92% in FY10 (ASSOCHAM) estimates, Indian paper industry witnessed a 10.6% growth in
per capita consumption and reached 9.2kgs in FY10. Total volumes at the end of
FY10 stood at 9.2 mn tonnes. On the supply side, at the end of FY10, paper
production capacity in India was estimated to be at ~9.7 mn tonnes with ~92%
capacity utilisation.

Today, the big challenge for the industry is the avail- Fibre, the primary raw material in paper manufacturing accounts for ~ 40% of
ability of raw material at reasonable cost the total cost. For fibre, industry is dependent on hard wood and bamboo (40%
of the requirement), agro waste (30%) and wastepaper (30%). Availability of
fiber at reasonable cost is a concern for the industry as Indian laws do not
permit leasing of land and deforestation. Though many large companies now
either have shifted or shifting to contract farming, industry still imports 2 mn
tonnes in the form of pulp and wastepaper or ~25% of the total pulp requirement
per annum. In the recent budget, the customs duty on rayon grade wood pulp
and waste paper is reduced to 2.6% from 5.2%, which is positive for the sector.

3
Wealth Research, Unicon Financial Intermediaries Pvt Ltd.
Email: wealthresearch@uniconindia.in
 West Coast Paper Mills Ltd.

Investment Rationale

Expanding paper consumption to drive the paper industry

Paper consumption in India is expected to touch 10.7 As per ASSOCHAM, paper industry to witness a CAGR of 8% with the total
mn MT by FY12 from 9.2 mn MT in FY10 paper consumption touching 10.7 mn tonnes by FY12. Paper consumption in
India is driven by industrial growth, improving living standards with
increasing disposable income, growing organised retail and service sectors,
government's thrust on education and low per capita paper consumption.

Increasing demand from organized retail sector for paper At 9.2kgs of per capita consumption, paper consumed in India is far below to
based bags and growing industrial output to help IP 42kgs in China and 350kgs in developed world. As per industry estimates, IP
segment grow at 7.5% in the next few years which account for ~50% of total paper consumed in India is expected to grow at
~7.5% backed by industrial growth and increasing demand for paperboard
based carry bags from organised retail. Implementation of Right of Children to
Free Education and Compulsory Act will require 1 lac tonnes of cream wove
paper per annum. In addition, increase in literacy rate to improve readership
and circulation for magazines and news papers. News print is estimated to
contribute for 15% of total paper demand is expected to grow at ~8.5% over the
next few years.

Branded copier segment which contribute for 5% of to- Further, increase in employment opportunities to have positive effect on paper
tal paper demand in the country is growing at 16% consumption. For example, each new IT employment process is estimated to
consume 4kgs of paper in the form of letters, instructions and training material.
In addition, increasing advertisement through mailers and growing banking
and mobile services are leading the WPP segment growth. Among different
types of WPP paper, branded copier segment is expected to grow at the fastest
annual rate of 16%. This segment gives better EBITDA margins and estimated to
contribute for ~5% of total paper demand in FY10.

Paper prices expected to rule with fewer expansion plans by the industry
With few expansion plans, industry average capacity As only few companies have expansion plans in the next two years, total
utilisation is expected to touch 100% by FY12 capacity additions by the end of FY12 would be ~1 mn tonnes or ~10% of the
present capacity. With few additions industry utilisations may touch 100% by
FY12. Planned capacity additions beyond FY12 too are not encouraging as only
~2.0 mn tonnes (Source: CRISIL Research) are expected in the next three years
ending FY15. With growing paper demand, the market is able to absorb the
additional capacities such as from WCPM.

Expected higher utilisation levels for next 3-5 years With higher capacity utilisations, paper industry may witness an improved
may bring in pricing power for the paper industry pricing power environment going forward. This scenario can already be
witnessed as companies have started upward revising their prices with the
raw material procurement costs such as transportation costs going up. WCPM
in Feb'11 increased its prices by ~2.5% across its product lines to match the
increase in these costs. With increasing pricing power, even if industry plans
huge expansions in the future, long gestation period of 3-5 years from plan stage
may benefit paper prices to rule firm.

However, increase in cheaper imports from China and other Asian countries
can spoil the industry's prospects, though their presence is negligible at the
moment.

4
Wealth Research, Unicon Financial Intermediaries Pvt Ltd.
Email: wealthresearch@uniconindia.in
 West Coast Paper Mills Ltd.
With the expanded capacity WCPM paper volumes are
expected to grow at 52.4% and 13.1% for FY11 and
FY12 respectively
WCPM is expected to witness increased cash flows
through reduced raw material requirement and surplus
power capacity
WCPM is expected to yield the benefits of contract farm-
ing starting from 2012
Wealth Research, Unicon Financial Intermediaries Pvt Ltd.
Email: wealthresearch@uniconindia.in
New paper capacity to drive the top line for WCPM
WCPM added 1,35,000 MT of paper capacity in May 2010, a 75% jump in its
total capacity. With growing paper consumption, WCPM was able to fully
utilize this additional capacity in less than six months of commissioning.
Utilisation of the expanded capacity touched 96% in 3QFY11 as compared to
72% in 2QFY11. With expected strong demand scenario goingforward, we
project WCPM paper volumes to grow by 52.4% and 13.1% in FY11 and F12
respectively. For the same period, increasing paper prices can lead to faster
growth rate in paper revenues at 66.1% and 16.5%. With the above expansion,
WCPM has also increased the thermal power generation from 40.3MW to
70.3MW, out of which it can export 20MW of surplus capacity to the grid.
Cost savings from expansion programme and contract farming to improve
EBITDA margins
With the recent expansion WCPM replaced the old pulp unit with Elemental
Chlorine Free (ECF) plant and increased capacity from 300 tpd to 725 tpd. With
the ECF process, consumption of pulp in paper manufacturing is expected to
come down by 10%. In addition, ECF process is also an environmental friendly
operation as it consumes 33% less water. Further, the increased capacity will
reduce the dependence on pulp from outside, thus improving operating margins.
As raw material costs amount to ~30% of net sales, the shift to ECF should
improve EBITDA margins by ~4%.
WCPM is investing in contract farming, by providing high yielding samplings
through clonal technology to the farmers. In contract farming the trees are
harvested after five years of planting them. Though WCPM is a late entrant in
contract farming, it has aggressive plans to cover up to 1 lac acres in the next
few years. At the end of FY10, WCPM has already covered 16,200 acres within
the radius of 250kms from the plant. With its contract farming start yielding
from year 2012, WCPM is expected to save on transportation costs as the current
average radius of the raw material sources is 800kms. WCPM expects to procure
at least 10% of its raw material requirement from contract farming in 2012 and
gradually increase to 50% of the requirement by the year 2016. As transportation
costs account for 15% of the total costs, we expect WCPM to benefit from the
gradual decrease in coverage area radius in the next few years. In addition,
with contract farming, WCPM will be able to achieve uniformity in raw material
quality and raw material security.
5
 West Coast Paper Mills Ltd.
Outlook & Valuation

With the WCPM utilisation levels already reaching 95%, we estimate a revenue
and EPS CAGR of 26.6% and 26.8% respectively for the three year period ending
FY13.

Besides, with the completed expansion programme and an expected surplus cash
flows scenario ahead we expect WCPM to increase dividend per share starting
FY11. On INR 3 per share for FY11, dividend yield works out to 3.75% which is
comparable with the industry average of 3.6%. At CMP of INR 80 the stock currently
trades at 5x our FY12e EPS.

From the below table, it can be seen that WCPM's share is trading in line with the
industry on both PE and EV/EBITDA parameters. Considering the fact that paper
companies are more or less comparable, we expect WCPM share has limited
chances of getting a premium over other companies. However, as we believe an
improved pricing power ahead for the paper industry, one may witness an
improved industry valuation going forward. Further, at today's price, WCPM
investment value in RNPL, a listed company, works out to INR 8 per share.

WCPM management is looking to convert the preferential shares into equity shares
by the end of FY11. We have considered the impact of the same from FY12 onwards.
In view of the above points, we value WCPM at 6x its FY12e EPS and a target price
of INR 95.4, giving an upside potential of 23.9% from current levels. Thus we
recommend Buy on the stock for decent gains in the next 12 months.

Peer Comparison
CMP Mkt Cap EBITDA Margins (%) PE (x) PB (x) EV/EBITDA (x) ROE (%)
(INR) (INR Mn) FY11e FY12e FY11e FY12e FY11e FY12e FY11e FY12e FY11e FY12e
BILT 32.5 21173 20.8 22.6 8.9 6.5 0.8 0.7 6.7 5.7 10.1 12.9
JK Paper 47.5 3800 20.0 23.2 3.5 3.4 0.6 0.5 NA NA 20.3 17.5
TNPL 123.0 8564 32.0 33.5 5.6 4.9 0.9 0.8 NA NA 17.4 17.5
WCPM 77.0 4832 23.5 23.9 5.4 4.9 0.8 0.6 7.1 5.3 14.8 14.8
Source: Bloomberg, Unicon Research

6
Wealth Research, Unicon Financial Intermediaries Pvt Ltd.
Email: wealthresearch@uniconindia.in
 West Coast Paper Mills Ltd.
Summarised Financials and Ratios
INR mn INR mn
Income Statement FY09 FY10 FY11E FY12E FY13E Balance Sheet FY09 FY10 FY11E FY12E FY13E
Revenues 6198 6239 10156 11799 12671 Net Assets 2068 8056 14547 13757 12957
Other Op. Income 0 0 0 0 0 CWIP 11200 7469 200 200 200
Total Op. Income 6198 6239 10156 11799 12671 Investments 460 467 467 467 467
Cost of Revenues 2193 2288 3112 3632 3955 Current Assets
% to Total Op. Exp. 43.9 44.6 40.1 40.4 40.6 Inventories 1437 1791 2539 2655 2534
Total Op. Exp. 4995 5128 7769 8984 9740 Sundry Debtors 434 342 711 826 887
EBITDA 1202 1111 2387 2815 2931 Cash & Bank Balances 2844 1166 914 988 982
Other Current Assets 1433 1833 2539 2950 3168
Other Income 79 63 63 63 63 Current Liabilities
Depreciation 199 238 978 989 1000 Current Liabilities 1915 1886 2031 2360 2534
EBIT 1082 936 1471 1889 1994 Provisions 147 213 102 118 127
Net Working Capital 4085 3033 4570 4941 4910
Interest 77 122 502 480 420 Total assets 17814 19025 19784 19366 18534
PBT 1005 815 969 1409 1574 Share Capital 121 125 125 142 142
Tax Provision 99 268 68 282 315 Reserves 4792 5238 5959 7475 8521
PAT 905 547 902 1127 1259 Non-Convertible Pref. shares 650 650 650 0 0
Advance against share capital 115 0 0 0 0
Secured Loans 9442 9396 9338 8133 6672
Unsecured Loans 2294 2951 3047 2950 2534
Def. Tax Liabilities 400 665 665 665 665
Total Liabilities 17814 19025 19784 19366 18534
INR mn
Cash flow Statement FY09 FY10 FY11E FY12E FY13E Key Ratios FY09 FY10 FY11E FY12E FY13E
PBT 1005 815 969 1409 1574 Profitability & Margins (%)
Add: Depreciation 199 238 978 989 1000 EBITDA Margin 19.4 17.8 23.5 23.9 23.1
Interest 77 122 502 480 420 EBIT Margin 17.5 15.0 14.5 16.0 15.7
Less: Direct Taxes Paid -131 -98 -68 -282 -315 Pre-tax Margin 16.2 13.1 9.5 11.9 12.4
Increase in Working Capital -399 -595 -1789 -297 25 PAT Margin 14.6 8.8 8.9 9.6 9.9
Other Miscellaneous 0 0 0 0 0 EPS 15.0 8.7 14.4 15.8 17.7
CF from Operations 751 481 593 2300 2704 Growth % 30.5 (41.9) 64.8 10.2 11.7
RoE 18.4 10.2 14.8 14.8 14.5
(Pur) / Sale of Fixed Assets -8167 -2497 -200 -200 -200 RoCE 6.2 5.1 7.7 10.1 11.2
(Pur.) / Sale of Investments 105 -4 0 0 0
Other Miscellaneous 0 0 0 0 0 Leverage (x)
CF from Investments -8062 -2501 -200 -200 -200 Debt / Equity 2.5 2.4 2.1 1.5 1.1
Interest Coverage 14.0 7.7 2.9 3.9 4.7
Change in Networth 900 0 0 0 0 Current Ratio 3.0 2.4 3.1 3.0 2.8
Change in Loan Fund 7686 611 38 -1302 -1877
Less: Interest Paid -77 -122 -502 -480 -420 Valuations (x)
Dividend Paid -201 -147 -181 -243 -214 EV/Sales 2.3 2.7 1.7 1.3 1.0
Other Miscellaneous 0 0 0 0 0 EV/EBITDA 12.0 15.0 7.1 5.3 4.5
CF from Fin. activities 8307 342 -645 -2026 -2511 P/E 5.1 8.8 5.4 4.9 4.4
Net Change in Cash 996 -1679 -252 74 -6 P/BV 1.0 0.9 0.8 0.6 0.6
Source : Company, Unicon Research

7
Wealth Research, Unicon Financial Intermediaries Pvt Ltd.
Email: wealthresearch@uniconindia.in
 West Coast Paper Mills Ltd.
Research Recommendation 2010
Date of Recommended
Company Name Report Type Sector Recommendation Target
Recommendation Price
7-Mar-11 Hindusthan National Glass & Industries Ltd. Initiating Coverage Glass Buy 212.0 351.0
28-Feb-11 Deepak Fertilisers & Petrochemicals Ltd. Initiating Coverage Fertilisers Buy 152.0 202.0
3-Feb-11 Ceat Ltd. Investment Idea Auto Ancillaries Buy 109.0 149.0
31-Jan-11 MIC Electronics Ltd. Initiating Coverage Led Display & Lighting Buy 31.6 51.0
12-Jan-11 Diamond Power & Infrastructure Ltd Initiating Coverage Power Buy 193.0 257.0
31-Dec-10 Hathway Cable & Datacom Ltd Initiating Coverage Media Buy 164.0 227.0
31-Dec-10 Jindal Poly Films Ltd Investment Idea Packaging Accumulate 525.0 620.0
31-Dec-10 Allahabad Bank Investment Idea Banking Buy 225.0 304.0
22-Dec-10 Sasken Communication Tech. Ltd Investment Idea IT Buy 168.0 226.0
30-Nov-10 Banco Product Initiating Coverage Auto Buy 93.0 149.0
30-Nov-10 Allcargo Global Logistics Investment Idea Shipping & Logistics Buy 155.0 233.0
18-Nov-10 Jyoti Structure Investment Idea Power Buy 137.0 171.0
16-Nov-10 Pennar Industries Investment Idea Steel Buy 49.0 63.0
3-Nov-10 HSIL Ltd Initiating Coverage Building Product Buy 141.0 171.0
27-Oct-10 IDBI Bank Initiating Coverage Banking Buy 171.0 228.0
26-Oct-10 MSP Steel and Power Initiating Coverage Steel Buy 72.0 114.0
29-Sep-10 Nakoda Textiles Investment Idea Textiles Buy 15.0 23.0
16-Sep-10 Kajaria Ceramics Investment Idea Ceramic Tiles Buy 70.0 88.0
15-Sep-10 Gokul Refoils Investment Idea Food Processing Accumulate 97.3 109.0
14-Sep-10 Aqua Logistic Investment Idea Logistic Hold 59.1 60.8
31-Aug-10 Lakshmi Precision Screws Investment Idea Fastner Accumulate 79.8 91.8
27-Aug-10 BGR Energy System Initiating Coverage Power Buy 786.0 1020.0
30-Jul-10 Patel Engineering Initiating Coverage Infrastructure Buy 416.0 480.0
26-Jul-10 KPR Mills Ltd Investment Idea Textiles Accumulate 156.0 181.0
14-Jul-10 IDBI Bank Investment Idea Banking Accumulate 125.0 142.0
9-Jul-10 Opto Circuit Initiating Coverage Healthcare Buy 243.0 293.0
26-Jun-10 BGR Energy System Ltd Investment Idea Capital Goods Accumulate 697.0 820.0
23-Jun-10 Biocon Ltd Investment Idea Pharmaceuticals Buy 321.0 387.0
19-Jun-10 Emmbi Polyarns Investment Idea Packaging Buy 15.6 26.0
18-Jun-10 Indian Bank Investment Idea Banking Buy 221.0 276.0
17-Jun-10 Diamond Power & Infrastructure Ltd Investment Idea Power Ancillary Accumulate 196.0 226.0
12-Jun-10 Man Industries Investment Idea Steel Pipes Buy 85.0 102.0
5-Jun-10 Usher Agro Investment Idea Food Processing Buy 79.0 110.0
10-May-10 Greaves Cotton Investment Idea Construction Buy 67.0 82.0
30-Apr-10 Indraprastha Gas Ltd Initiating Coverage Gas Distribution Buy 233.0 290.0
16-Apr-10 Heidelburg Cement Investment Idea Cement Accumulate 59.0 60.0
16-Apr-10 KEC International Ltd Investment Idea Power Transmission Accumulate 570.0 655.5
16-Apr-10 Piramal Glass Ltd Investment Idea Packaging Accumulate 97.0 111.6
7-Apr-10 Setco Automative Investment Idea Auto Ancillaries Buy 90.0 135.0
6-Apr-10 Den Networks Investment Idea Media Accumulate 197.0 226.6
5-Apr-10 Arshiya International Investment Idea Logistic Buy 204.0 291.0
22-Feb-10 Patni Computer Initiating Coverage IT Buy 475.0 590.0
6-Feb-10 Shree Cement Ltd Initiating Coverage Cement Buy 1995.0 2470.0

8
Wealth Research, Unicon Financial Intermediaries Pvt Ltd.
Email: wealthresearch@uniconindia.in
 West Coast Paper Mills Ltd.
Unicon Investment Ranking Methodology
Rating Buy Accumulate Hold Reduce Sell

Return Range >= 20% 10% to 20% -10% to 10% -10% to -20% <= -20%

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9
Wealth Research, Unicon Financial Intermediaries Pvt Ltd.
Email: wealthresearch@uniconindia.in