BAV

Assignment 4 - Seshasayee Paper

Relative Valuation
Group 2
Abhishek Anand
Abhishek Bhandari
Kartik Deuskar
Ranjana Tewari

Contents
1 Firms Selection
2 Cost of Capital
3 Industry Comparables
4 Market Comparison
5 Recommendation
 From Capitaline

Net profit
Paper - Large Sales NP Price Margin
AP Paper 486.79 24.64 84 5.1%
Ballarpur Inds. 2,162.33 250.75 135 11.6% Not chosen because of the High
Bilt Industrial 173.55 -88.69 NL* -51.1%
Emami Paper 155.69 16.16 NL* 10.4%
Hind.Newsprint 304.7 15.68 NL* 5.1%
Hind.Paper Corp 702.9 58.71 NL* 8.4%
JK Paper 756.41 45.91 40 6.1%
Mysore Paper 400.44 0.63 9 0.2% Not chosen as the net profit figu
Pudumjee Agro 78.85 1.18 38 1.5%
Pudumjee Pulp 188.41 3 83 1.6%
Rama Newsprint 351.47 24.53 25 7.0%
Ruby Macons 127.51 10.83 NL* 8.5%
Satia Paper Mill 106.19 0.23 NL* 0.2%
Seshasayee Paper 457.6 41.42 168 9.1%
Shreyans Inds. 198.25 6.62 39 3.3% Not chosen as the net profit figu
Sirpur Paper 241.89 13.66 76 5.6%
Star Paper Mills 210.85 6.16 32 2.9% Not chosen as the net profit figu
T N Newsprint 884.42 87.62 103 9.9%
West Coast Paper 555.21 66.42 94 12.0%

NL-> Not lIsted

Chosen Firms
AP Paper
JK Paper
Rama Newsprint
Sirpur Paper
T N Newsprint
West Coast Paper

Firms Year End Sales NP Div% B.V Rs

AP Paper 200703 486.79 24.64 10 157.4
JK Paper 200706 756.41 45.91 6 47.5
Rama Newsprint 200703 351.47 24.53 0 52.3
Seshasayee Paper 200703 457.6 41.42 35 125.4
Sirpur Paper 200703 241.89 13.66 35 115.4
T N Newsprint 200703 884.42 87.62 40 83.3
West Coast Paper 200703 555.21 66.42 150 51.9
om Capitaline

ot chosen because of the High sales making it less comparable to Seshasayee

ot chosen as the net profit figure is very low as compared to Seshasayee

ot chosen as the net profit figure is very low as compared to Seshasayee

ot chosen as the net profit figure is very low as compared to Seshasayee

CPS Rs. EPS Rs. Price Price Date Mkt. Cap. P/C P/E
25.5 9.4 84 1/11/2007 216.9 3.3 9
12.3 5.9 40 1/11/2007 311.82 3.2 6.8
9.9 4.2 25 1/11/2007 147.73 2.6 6
49.4 36.2 168 1/11/2007 189.39 3.4 4.7
15.5 8.5 76 1/11/2007 114.38 4.9 9
21.6 12 103 1/11/2007 715.29 4.8 8.6
19 14.3 94 1/11/2007 419.29 4.9 6.6
P/BV
0.53
0.84
0.48
1.34
0.66
1.24
1.81
Multiples chosen

P/E
EV/EBITDA
EV/Capacity

P/E
Fundamental Factors

Dividend
Company EPS Price P/E trailing Payout Growth
AP Paper 9.4 84 8.94 10.4% 5.7%
JK Paper 5.9 40 6.78 31.9% 7.5%
Rama Newsprint 4.2 25 5.95 0% 8.1%
Seshasayee Paper 36.2 168 4.64 8.2% 31.0%
Sirpur Paper 8.5 76 8.94 38.4% 3.5%
T N Newsprint 12 103 8.58 31.6% 10.9%
West Coast Paper 14.3 94 6.57 42.8% 23.1%
Median 6.78 32% 8.1%
Average 7.20 23% 12.8%

Reason for the use of the Multiple Simplicity of use, all the comparable firms had positive earnings,

Based on P/E multiple the firm is undervalued as compared to its competitors. This is because of the
years along with the investments it has made to increase its capacity to ensure high growth is sustain

EV/EBITDA
Fundamental Fa
Deprecition
&
Amortization
Company EV EBITDA EV/EBITDA Tax Rate /EBITDA
AP Paper 718.27 76.3 9.41 10.60% 35%
JK Paper 818.26 140.43 5.83 4.70% 30.70%
Rama Newsprint 392.52 92.01 4.27 11% 42.50%
Seshasayee Paper 361.07 69 5.23 8% 23.60%
Sirpur Paper 344.47 30.83 11.17 11.60% 28%
T N Newsprint 1255.68 212.36 5.91 20.80% 39.30%
West Coast Paper 705.83 65.94 10.70 8.10% 25.70%
Median 5.91 11% 31%
Average 7.50 11% 32%

The multiple covers the aspect of depreciation in a much clearer way than the P/E multiple. Since we a
accounting is taken care of. Also this multiple takes care of the differences in the leverage of firms.Sin
addition, this multiple is particulary helpful because of the reasons stated above.

Fudamental Factors impact

Tax rate Higher the tax rate lower the multiple
Depreciation Higher the DA/EBITDA lower the multiple
Cost of Capital Higher the cost of capital lower the multiple
Expected Growth Higher the expected growth higher the multiple
Reinvestment (Capex) Higher the reinvestm,ent lower the multiple

The EBITDA multiple is low both as median and average for Seshasayee paper. After looking at fundam
rate low DA expense. However it has a higher cost of capital. On the whole the firm is comparable to W
the other firms. Hence the group finds the stock as Undervalued in terms of EBITDA multiple

EV/Total Capacity
& Fundamen
Amortization
Capacity /
tonnes' EV/Capacit Capacity(Rs./
Company EV 000 y (Rs. /Kg) Tax Rate kg)
AP Paper 718.27 154 46.6 10.60% 1.7
JK Paper 818.26 195 42.0 4.70% 2.2
Rama Newsprint 392.52 132 29.7 11.00% 3.0
Seshasayee Paper 361.07 115 31.4 8.00% 1.4
T N Newsprint 1255.68 245 51.3 20.80% 3.4
West Coast Paper 705.83 164 43.0 8.10% 1.0
Mean 40.7 10.5% 2.1
Median 42.5 9.4% 2.0

The multiple was chosen as it covers two important aspects of related to a paper company. The funda
per kg and the efficiency of the firm

Fudamental Factors impact

Tax rate Higher the tax rate lower the multiple
Depreciation Higher the DA/Capacity lower the multiple
Cost of Capital Higher the cost of capital lower the multiple
Expected Growth Higher the expected growth higher the multiple
Reinvestment (Capex) Higher the reinvestment lower the multiple
EBIT/Capacity Higher the EBIT per capacity higher the multiple

The firm has a below average multiple. The tax rate, cost of capital and depreciation per kg is below t
which means that the realisation and the efficiency of the firm is on par with that of the whole industr
growth because of capacity addition in pulp as well as paper production the firm is trading below the v
Hence the group finds the stock Undervalued on the basis of EV/Capacity multiple
undamental Factors
Average
Growth Last
Cost of equity
5 years
12.01% 8.4%
13.03% 7.5%
11.63% 5.0%
12.58% 22.7%
12.20% 5.6%
11.50% 8.2%
11.54% 16.0% 217.2
12.0% 8.2%
12.1% 10.5%

had positive earnings,

This is because of the high growth the firm has experienced in the last couple of
high growth is sustained in the coming years.

Fundamental Factors
Reinvest
Expected ment /
Cost of Capital
Growth EBITDA
8.33% 8.4% 1.57
10.88% 7.5% 0.23
10.34% 5.0% 0.06 Plans to increase the capacity from 132k tonnes to 300k tonn
9.31% 22.7% 0.68
8.48% 5.6% 1.69
9.29% 8.2% 0.42
9.37% 16.0% 0.47 517.79 274.01 243.07
9.3% 8.2% 0.47
9.4% 10.5% 0.73

P/E multiple. Since we are using the EBITDA the difference in the depreciation
e leverage of firms.Since the paper industry is under going a period of capital
e.
After looking at fundamental factors we find that the firm has high growth, low tax
firm is comparable to West Coast paper in almost all aspects and is better off most of
BITDA multiple

city
Fundamental Factors

Reinvest EBIT/Capac
Expected ment ity
Cost of Capital
Growth Rs/kg (Rs./Kg)
8.33% 8.40% 7.8 2.89
10.88% 7.50% 1.7 4.72
10.34% 5% 0.4 3.07
9.31% 22.70% 4.1 3.73
9.29% 8.20% 3.7 5.46
9.37% 16% 1.9 3.02
9.6% 11.3% 3.2 3.82
9.3% 8.3% 2.8 3.40

er company. The fundamental factor EBIT/capacity covers the aspects of realisation

ation per kg is below the industry average. The firm has an average EBIT/capacity
at of the whole industry. With a much higher growth in the past and high expected
m is trading below the value which could be near or higher than the industry average.
tiple
2k tonnes to 300k tonnes by FY08. However no addition of capex is seen in the balance sheet (forecasted capex
alance sheet (forecasted capex of Rs 400 crores). If this is taken into consideration then reinvestment can subst
n then reinvestment can substantialy rise
Market
Sales NP Mkt. Cap. P/E
All Companies 2,934,641.09 240,331.14 6,522,388.56 27.14
Seshasayee Paper 457.6 41.42 189.39 4.57
Industry (Selected Firms) 3733.79 304.2 2114.8 6.95

Clearly in terms of market P/E and Industry P/E the firm seems to be undervalued.

Recommendation

Based on the relative valuation the Group recommends a buy for the stock and views definite upside w
and views definite upside with a the target price of 198-210
RFR 8%
Returns of Index (1991 till
date) 17%
Risk Premium 9%

D/E book Beta of

Beta Cost of Equity Market Cap
value firm
AP Paper 0.25 1.13 0.446 12.01% 216.9
JK Paper 0.38 1.8 0.559 13.03% 311.82
Rama Newsprint 0.42 0.88 0.403 11.63% 147.73
Seshasayee Paper 0.51 1.5 0.508 12.58% 189.39
Sirpur Paper 0.51 1.25 0.466 12.20% 114.38
T N Newsprint 0.5 0.79 0.389 11.50% 715.29
West Coast Paper 0.58 0.82 0.394 11.54% 419.29

Average 0.452 1.167

Tax rate 34% 1.13

unlevered beta 0.26

Interest Coverage Ratio

Rating Spread
> 12.5 AAA 0.75%
9.5 – 12.5 AA 1.00%
7.5 – 9.5 A+ 1.50%
6 – 7.5 A 1.80%
4.5 - 6 A- 2.00%
3.5 – 4.5 BBB 2.25%
3 – 3.5 BB 3.50%
2.5 - 3 B+ 4.75%
2 – 2.5 B 6.50%
1.5 - 2 B- 8.00%
1.25 –1.5 CCC 10.00%
0.8 – 1.25 CC 11.50%
0.5 – 0.8 C 12.70%
< 0.5 D 14.00%

Based on Ashwath Damodran Low market Cap firms

 D/(D + E)
Cost of
Debt EV Cost of Debt Market
Capital
Value
511.09 718.27 10.25% 0.70 8.33%
513.19 818.26 14.50% 0.62 10.88%
245.58 392.52 14.50% 0.62 10.34%
243.78 361.07 10.25% 0.56 9.31%
247.19 344.47 10.25% 0.68 8.48%
559.39 1255.68 9.80% 0.44 9.29%
293.54 705.83 9.50% 0.41 9.37%

BACK
304.27 279.75 292.01
245.58 267.16 256.37 0.88