Ruchira Papers Allotment

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ICICIDirect - Ruchira Papers IPO

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 India . The company is looking at reducing costs by setting up the chemical recovery plant and the power cogeneration plant. In a move to diversify its product portfolio, it has also entered the Writing and Printing paper segment.

Locational advantage

The company benefits from various tax waivers as its plant is located in Himachal Pradesh:

• 100% excise duty exemption up to June 9, 2013

• 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

• Concessional rates of central sales tax at 1% as against 4% in other states

• 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 Punjab .

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.

IPO - Ruchira Papers: Invest

Investors can consider subscribing to the initial public offer by Ruchira Papers. The company, which has been riding the boom in the textile industry, plans a foray into the writing and paper business, which is in a growth phase.

Valuations appear moderate, even on an expanded equity base. The high leverage proposition that the company has adopted, however, is a cause for concern.

Kraft Paper

Ruchira Papers' manufactures kraft paper, which is largely used by the packaging industry.

The company has recorded a commendable 16 per cent revenue growth over a four-year period, which appears to have been contributed by the textile industry boom. Kraft paper is used in the fabric and yarn industries.

With a slowdown of capacity additions in the textile industry revenue growth from this segment is expected to be sluggish in the medium term. The company operates in a raw-materials intensive business, with inputs accounting for about 74 per cent of operating costs. The company enjoys locational advantages as it is situated near the hub of agricultural activity.

Though operating margins have been on the decline, falling prices of caustic soda are expected to ease the pressure.

Writing and Printing Paper

The company plans to foray into the writing and printing paper segment, which is on an uptrend.

With the governments focus on education and scope for improvement in literacy levels, revenue growth prospects appear to be bright. The company proposes to use the same line of inputs that it uses for its kraft paper business — agri-waste.

Ruchira Papers plans to set up a 33,000-tonne facility at its existing site in Himachal Pradesh and plans to commence commercial production in the middle of FY-08. The company plans to sell the size — free paper to local players in the notebooks business.

Offer Details

Ruchira Papers plans to raise Rs 23.5 crore from the public by offering shares in a price band of Rs 21-23.

The promoters would also chip in, taking the total proceeds from the offer to Rs 28.5 crore. The company plans to set up a paper and chemical recovery plant and a 6-MW captive power plant.

The company plans to meet a substantial part of its project by raising debt to the tune of Rs 94 crore.

Punjab National Bank and A.K. Capital Services are the mangers to the offer, which opened on November 23, and closes on November 29.

NetworthStock - Ruchira Papers IPO

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Ruchira Paper: Sharekhan IPO Flash dated November 21, 2006

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