TNPL: Paper money

Capacity addition will boost earnings and revenues, but valuations are expected to remain unchanged.

The future of Tamil Nadu Newsprint and Papers Ltd (TNPL) is already published. The Indian paper market is among the fastest growing markets in the world, with a growth rate of seven-eight per cent. The per capita consumption of paper in India is around 8.5 kg, which is very low compared to the Asian average of 45 kg and the world average of 55 kg. Hence, TNPL looks well placed in terms of demand.

Globally, there has been a shortage of paper pulp due to the earthquake in Chile in February 2010, say experts. Chile accounts for eight per cent of the world’s pulp output. Therefore, the company has started using bagasse-sugarcane waste as a raw material for manufacturing paper. When dynamics of the global paper industry are changing, such strategising can place TNPL in a sweet spot, reckon analysts.

Paper prices have increased sharply of late to stabilise at around Rs42,000 a tonne. In such a favourable time, TNPL also plans to modernise and create additional capacities of around 500,000 tonnes by 2011-12. If these capacities come onstream, there could be a pressure on prices. However, strong demand is likely to restrain the fall in prices.

TNPL is currently in the process of installing new paper machine capacity and will be increasing its production capacity from 245,000 million tonnes per annum (MTPA) to 400,000 MTPA by September at an outlay of Rs1,000 crore. The capacity addition will boost earnings and revenues, but valuations are expected to remain in line with the historic patterns of around 8-10 times of prices to earnings, giving it a pure commodity status.

The value addition angle for the paper manufacturer has been missing, unlike other players in the similar business. Hence, volume growth and price spikes will be the only driving factors.