Capital Structure
Authorised Capital: 31,000,000 shares of Rs 10 each
Equity shares outstanding prior to issue: 10,030,500 of Rs 10 each
Equity shares outstanding after the issue: 38,530,500 of Rs 10 each
Promoters’ share before the issue: 43.51%
Promoters’ share post-issue: 24.30%
Background
Ruchira Papers is one of the largest paper-manufacturing companies in the country that uses agro waste as raw material. It is also capable of using three types of feedstock to manufacture paper. It started commercial production in 1983 as an agro waste paper mill for manufacturing Kraft paper with a small capacity of 2,310 tonnes per annum. Over the years, the production capacity has been increased to 52,800 tpa. The paper industry is competitive and the company’s strategy is to enhance revenue in future through better realizations, quality control, cost reduction and yield improvement.
Objectives of the Issue
The company intends to use the issue proceeds to part finance setting up of a new 33,000 tonnes Writing & Printing paper plant along with a chemical recovery plant and 6 MW co-generation power plant.
Key Investment Rationale
Rising demand for paper
The paper sector follows the trends of the economic growth of a country. The domestic paper sector is expected to grow at a CAGR of 6-7% for the coming five years. Post its capacity expansion, the company would become one of the top few paper mills in the organized sector in
Locational advantage
The company benefits from various tax waivers as its plant is located in Himachal Pradesh:
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100% excise duty exemption up to
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100% income tax exemption for first five years, and thereafter 30% exemption for the next five years from the date of start of commercial production of the proposed project
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Concessional rates of central sales tax at 1% as against 4% in other states
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Capital investment subsidy @ 15% of investment in plant and machinery, subject to a ceiling of Rs 30 lakh.
Other advantages
The company has access to cheap and uninterrupted power supply. The power tariff in Himachal Pradesh is Rs 3.25 per unit as against Rs 4.00-4.50 in other states. Its cost of power after it sets up the co-generation plant would decline to Rs 1.90 per unit making it highly competitive. It also has an advantage of availability of ample raw materials and agro wastes from neighboring states of Haryana and
Key Concerns
Intensifying competition
The writing and printing segment in the paper sector is highly competitive as far as pricing is concerned. Demand for writing and printing paper is expected to increase with a CAGR of only 4.8% - 5.6% for the coming five years as against the coated paper and specialty segment paper which enjoys a higher pricing flexibility and a CAGR of 9.2% and 7.2% respectively.
Product portfolio diversification
Though the company has diversified its product portfolio, it would be difficult to retain its competitive edge in case it shifts production to higher quality paper types that use pulp as the raw material. With a shift of product mix, the procurement of pulp and the cost of transportation would result in raw material costs rising.
No hedge against price fluctuations
The company does not have any long-standing purchase or sale agreement for its raw materials and products respectively. With almost all major paper manufacturers in the country expanding, paper prices are expected to face pressure.
Financials
The company posted a top line of Rs 62.61 crore and bottom line of Rs 4.65 crore in FY06. For Q2FY07 it clocked sales of Rs 37.75 crore and net profit of Rs 3.02 crore. Operating margins were 15.13% in FY06 and 13.56% for Q2FY07. Net margins are in the range of 7.44% in FY06 and 8% in Q2FY07. Raw material cost accounted for 60% of the top line. The capacity utilization for FY06 was 80.25% and is expected to increase to 85% for FY07. The company expects the new capacity to come on stream by June 2007.
Valuation
At the price band of Rs 21 - 23, the issue is reasonably valued at 8.2x - 9x the annualized diluted FY07 EPS of Rs 2.60. The company’s profitability might dip due to interest cost of high debt. However, as utilization of the expanded capacity increases, the company is expected to reap the benefits of reduced expenditure on chemicals and power along with the tax benefits. Reduction in power cost is expected to increase operating profits by Rs 5.76 crore from FY08 this would boost up the company earnings. Investors could consider subscribing to the issue from a long-term prospective.