Value Pick

13 June 2011 Time Horizon 12 Months

West Coast Paper Mills

Key Data Price (Rs.) Market Cap (Rs.Crs.) 52 High / Low (Rs.) Mcap/Sales TTM Book Value (Rs.) PE EPS P/BV FV BSE NSE Ket Financials (Rs Crores) Net Sales PBIDT Interest Depreciation Net Profit EPS (Rs) Equity Capital FV PE (x) 87 548.75 111.85/63 0.66 96.49 6.1 14.4 0.9 2 500444 WSTCSTPAPR

CMP 87

Buy

Target 105

Investment Rationale ~ Upbeat Industry scenario ~ Re rating of the sector ~ New capacity additions give future visibility ~ Entry barriers is positive for West Coast ~ Less dependency of imported pulp Company Background West Coast Paper Mills (WCPM), part of Bangur group is one of the leading player in the Indian Paper Industry. Apart from paper the company is also into manufacture & sale of Optical Fibre Cable and Jelly Filled Telephone cables. WCPM's Paper Division is located at Dandeli in Karnataka and Cable Division in Mysore, Karnataka. Further the company owns six windmills with an installed capacity of 1.75 MW in Tamil Nadu and majority of this wind power is supplied to Tamil Nadu Electricity Board. Its group companies include Sudarshan telecom manufacturing optical fibre cables, Rama News print and papers in printing and writing print, the Kilkotagiri Tea and Coffee Estates co. in tea and coffee plantations and The Thirumbadi Rubber Company in rubber plantations estate. Product profile of the company is mainly paper and paperboard which accounts of 94% of the total revenues with cables segment contributing a miniscule of 6%. Financial Performance WCPML revenues went up by 103% YoY( Q4,11 Vs Q4,10) and 17% QoQ (Q4,11 Vs Q3,11) as utilization of new paper mill achieves optimum production. EBIDTA was up by 110% YoY while QoQ it fell by 15%. This was due to breakdown of power turbine which is major part of expenses. West Coast had recently commissioned capacity expansion programme, which included the replacement of existing pulp mill of 300 TPD with new pulp line of 800 TPD, a new paper machine for writing/printing grade papers, additional equipments in Chemical recovery and utility section. The production capacity has gone up to 320,000 tpa.

FY10 623.91 116.38 11.15 23.77 54.7 8.72 12.55 2 9.98

FY11 1064.73 240.19 51 96.1 90.08 14.36 12.55 2 6.06

% chg 70.65 106.38 357.40 304.29 64.68 -

Latest Quarterly results (Rs Crores) Mar-10 Net Sales 168.99 PBIDT 29.83 Net Profit -1.16 Equity 12.55 EPS -0.18 Shareholding Pattern (%) Foreign Institutions Corp. Holding Promoters Public&Others

Mar-11 % chg 343.99 103.56 62.64 109.99 22.55 2043.97 12.55 3.59 -

Dec-10 0.83 7.01 13.9 51.77 26.5

Mar-11 0.74 7.1 12.98 51.95 27.25

chg -0.09 0.09 -0.92 0.01 0.75

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Value Pick
13 June 2011 Time Horizon 12 Months

Balance Sheet SOURCES OF FUNDS: Share Capital Reserves & Surplus Loan Funds Deferred Tax Liability Other Liabilities Total Liabilities APPLICATION OF FUNDS: Fixed Assets Investments Current Assets, Loans & Advances Inventories Sundry Debtors Cash & Bank Balance Current Liabilities & Provisions Provisions Net Current Assets Total Assets

FY11

FY10

77.55 592.93 1212.46 68.59 1951.53

77.55 523.78 1234.71 66.49 1902.53

~ Upbeat Industry scenario The consumption of paper is an accurate reflection of industrial activity and a nations economic health. Empirical evidence points out to a strong co-relation of 0.75x between GDP growth and paper demand, with a multiplier factor of 1.05x. The robust growth in demand for consumer durables and FMCG products is expected to ensure healthy off take for the industrial paper/paperboard segment. The increasing spends on literacy at the public and private levels should boost demand for paper. Simultaneously, the buoyancy in the economy is expected to reflect in heightened demand for office printing and stationery. Demand from the academic, corporate, industrial and retail paper segments will keep paper production upbeat the next two years. Demand for newsprint is also likely to remain strong due to a healthy outlook on the print media industry. The domestic paper industry ranks 15th in terms of capacity globally at ~9m mt, with estimated sales of INR321bn. Domestic paper manufacturer are also reporting a hike in global pulp prices on anticipation of huge demand from Japan, where production has been hit by the tsunami. Japan is one of the largest paper consumers globally, is pegged close to 10mn tones a year. It is also expected that prices are set to increase on theses various concerns and demand supply mis-match. Industry estimates peg the growth potential of this segment at 8-10% over the next 3-4 years. ~ Re rating of the sector Post the AP paper deal of International paper acquiring stake in AP paper at a premium there has been re-rating of the sector which has been a laggard for a long time now. Century Textile is also in the news to hive off their paper division which shows that there would be consolidation in the sector which was laggard and undervalued so far will come in limelight going forward. ~ New capacity additions give future visibility A jump in total capacity after the expansion phase over and with ~95% utilization levels will help to add on to the top line of the company going forward. West Coast had recently commissioned capacity expansion programme, which included the replacement of existing pulp mill of 300 TPD with new pulp line of 800 TPD, a new paper machine for writing / printing grade papers, additional

1528.4 46.71 577.37 200.95 73.16 75.79 200.95 23.34 376.42 1951.53

1552.52 46.71 513.2 179.06 34.24 116.59 209.9 23.78 303.3 1902.53

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equipments in Chemical recovery and utility section. The production capacity has gone up to 320,000 tpa. ~ Entry barriers is positive for West Coast Setting up new capacities in paper requires substantial capital outlay. Given the importance of captive power generation and mandatory ECF compliance, it is estimated that a setting new venture would entail an investment of INR80,000-100,000/mt, with a minimum viable plant size of 50,000mt, implying a total capex of INR4-5bn. Besides the huge capital outlays, the requisite environmental clearances and availability of land & water also pose significant challenges to new projects, thereby restricting the entry of new players into the industry. Mindful of the above limitations, the industry is closeted in nature, with existing players preferring to go in for Brownfield expansions, which cost ~ INR30-000-40,000/mt. additionally, most of the new capacities, are based on wastepaper and agri-residue, as linkages to forests and environmental clearances are difficult to obtain. ~ Less dependency of imported pulp A large portion of WCPMLs paper production is wood-based for which it procures wood from cooperative plantations and government notified forests and manufactures its own pulp. This way, it not only has complete control over the quality of its raw material but also eliminates any volatility in its contribution margin by relying on imported wood pulp or waste paper. A noteworthy aspect of WCPMLs operations is its efforts to secure raw materials supplies for future operations through agro-forestry. Over the last two years, it has employed the contract farming technique, using fallow land, otherwise unfit for cultivation of traditional crops, to grow disease resistant varieties of eucalyptus, acacia and casuarinas trees. It provides all the inputs and infrastructure viz. seedlings, fertilizers, etc., thereby eliminating any cash infusion from the farming community. Upon maturity, these trees are harvested and purchased at pre-determined rates from the farmers, ensuring a steady stream of income. The company envisages covering 40,000 acres in this manner, securing supplies of a significant portion of its future raw material requirement. We expect tangible results from this endeavour to reflect in WCPMLs raw material costs from FY13 onwards.

Ratios Analysis ROE % DE PBIDT Margins % PAT Margins %

2011 13.44 1.81 22.56 8.46

2010 9.10 2.05 18.65 8.77

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Financial Estimates (in crs) Net Sales PBDIT PBDIT % PAT PAT Margin % EPS Equity FV PE @ CMP

FY12E 1255.0 224.0 17.8 104.0 8.3 17 12.6 2.0 5.2

FY13E 1455.0 294.0 20.2 126.0 8.7 20 12.6 2.0 4.3

Valuation At CMP of Rs. 86, the stock trades at 5.2x and 4.3x FY12e & FY13e EPS. The stock has traded at an average 2 years forward multiple 5.1x from last 5 years. Hence, we value the WCPM at a PE of 5.1x to our FY13 EPS of ~Rs 20 to arrive at a fair value of Rs 102 per share. Also, West Coast holds a 36.3% stake in Rama Newsprint. Based on Rama Newsprints current market price of Rs 16 and a holding company discount, it translates to Rs 3 per West Coasts outstanding share. Therefore, our fair value estimate for West Coast is Rs 105 per share.

Concern ~ Slow progress of Captive plantation, ~ Fluctation in Paper Realisation prices, ~ Industry is highly linked with GDP growth any slow down in GDP will have cascading effect to industry.

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