A craft of waste

IPO REVIEW

Ruchira Papers will be a decent investment for long-term investors.

Ruchira Papers is coming out with an initial public offering of 285 lakh shares, priced within a band of Rs 21-23 each.

The company plans to raise funds in the range of Rs 59.85 crore to Rs 65.5 crore and will use the proceeds from the issue to finance 21 per cent of its expansion plans, while the rest will be financed through debt.

Ruchira Papers manufactures kraft paper, which is used in the packaging industry. It has a 52,800 tonne per annum plant in Himachal Pradesh. The company uses agro wastes like wheat straw, bagasse and sarkanda as its main raw materials.

Ruchira's kraft paper has load bearing capacity and tensile strength, which makes it suitable for making corrugated boxes.

Ruchira is now planning to diversify its product portfolio, by entering the writing and printing paper segment by setting up a 33,000-tonne writing and printing paper plant along with chemical recovery and 6 MW co-generation power plant.

The domestic paper industry is poised to grow at a CAGR of 7 per cent over the next five years. The per capita paper consumption in India is one tenth of the global average, but with rising industrial production and the growth in packaging has driven the demand for industrial paper.

Paper is becoming a favoured packaging option due to ecological problems caused by plastic usage. The printing and writing paper demand is rising thanks to increased public spending on education, publicity and literacy. The business potential for paper makers looks promising.

Being located in Himachal Pradesh, Ruchira enjoys excise duty exemptions, subsidies and tax waivers. This paper maker benefits from ample supply of raw material and agro wastes from the neighbouring states of Haryana, Punjab and Himachal Pradesh. It is well positioned to cater to the packaging demand from FMCG plants located in Northern India.

Paper is power-intensive but Ruchira has access to cheap and uninterrupted power supply and once its co-generation plant comes up, it will result in a further decline in power costs. The company is setting up the chemical plant to recover caustic soda, which will be re-used.

At present, Ruchira operates at 80.25 per cent capacity utilisation, but the utilisation rate is expected to increase to 85 per cent in FY07. The new plant is likely to come on stream by June 2007. 
 

PAPER PROFITS
(Rs crore)	FY06	FY05	FY04
Net sales	62.64	48.60	44.47
Y-o-Y growth (%)	28.89	9.29	17.03
Operating profit	8.95	6.42	5.51
Y-o-Y growth (%)	39.41	16.52	44.62
OPM	14.29	13.21	12.39
Net profit	4.66	3.79	2.24
Y-o-Y growth (%)	22.96	69.20	194.74
NPM	7.44	7.80	5.04

In FY06, the company's sales and net profit stood at Rs 62.6 crore and Rs 4.7 crore respectively. The operating and net margins stood at 15 per cent and 7.4 per cent. During the September 2006 quarter, the company earned revenues of Rs 37.7 crore. The net profit were Rs 3 crore with margins of 7.95 per cent.

Ruchira's share is valued at 8.7 times at its floor price and 9.5 times its cap price with annualised FY07 earnings estimated at Rs 2.4 per share. The valuations of its peers stand at Shree Bhawani Papers (9.3x) and Malu Paper (3.2x). Analysts feel the issue is reasonably priced and should do well in the long term.

"Given Ruchira's small size and scale and low value-added target segment, we find little value generation in the short-term. Hence, we recommend subscribe for a long term horizon of two to three years, "says a report by Anand Rathi Securities.

"Ruchira Papers' profitability might dip due to interest cost of high debt. However, a utilisation 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. Investors could consider subscribing to the issue from a long-term prospective," says a report by icicidirect.com.

Issue opens: November 23
Issue closes: November 29