TNPL: Tough times

Low volumes and high input costs prove costly

An insignificant volume growth and high raw material costs have resulted in a weak quarter at Tamil Nadu Newsprint (TNPL). Net sales went up 5.6 per cent y-o-y in Q4 FY07, while operating profit was 4.4 per cent lower.

While paper prices have been higher on y-o-y basis, raw material costs increased at a faster pace. As raw material costs increased by 670 basis points y-o-y as a percentage of sales in the March 2007 quarter.

Consequently, operating margin declined 267 basis points to 25.7 per cent. Even Ballarpur Industries faced a similar problem in the March quarter as operating profit margin declined 110 basis points y-o-y.

In FY07, TNPL's paper sales were flat at 2.31 lakh tonne. One good thing is that the high-margin copier paper grew at 18 per cent, and accounted for nearly 20 per cent of the total sales. In FY07, its operating margin improved 75 basis points to 24.4 per cent, as sales grew 10 per cent and there was some reduction in raw material costs too.

By August 2007, its pulp production capacity will increase from 520 tonne a day to 800 tonne a day along with chlorine-free bleaching operations. This will increase its capacity from 230,000 tonne a year to 245,000 tonne a year. TNPL plans to increase capacity to 365,000 tonne a year by September 2009.

Meanwhile, it is also setting up a small cement plant, which will use lime sludge, a residue generated after making paper. It also plans to construct a 4 lakh sq ft IT park at Ambattur, near Chennai. These diversification could be the triggers for the stock, which has been an underperformer over the past two years. TNPL trades at 7.5 times FY07 earnings.

Unitech: On firm ground

Unitech reported impressive results for FY07, helped by the sale of commercial assets to Unitech Corporate Park, a vehicle which was listed on Londons Alternative Investment Market in December, 2006, coupled with rapid growth in its key property markets of Noida, Gurgaon and Kolkata.

As a result, consolidated operating profit surged 1091 per cent y-o-y to Rs 2,001.8 crore in FY07, while net sales grew 255 per cent y-o-y to Rs 3,288 crore. Analysts estimate that nearly Rs 650 crore of profit in the previous financial year for Unitech came from the listing of Unitech Corporate Park.

As a result, operating profit margins surged 4,270 basis points y-o-y to 60.9 per cent in the previous year. The stock has outperformed the broader market thanks to improved performance in the previous financial year, coupled with increased investor interest in this sector, given the forthcoming IPO of rival DLF. As a result, the stock has gained over 50 per cent over the past three months compared with 12 per cent rise in the Sensex.

Unitech, in FY07, delivered approximately 8 million square feet, which is expected to rise to 15 million square feet in FY08. However, with the RBI having taken several steps to curb bank credit to the housing sector and over-heated property markets, analysts expect a softening in price realisations for real estate companies.

Thermax: Input costs hurt

Thermax has once again leveraged the current upturn in the power and engineering sector in the March 2007 quarter. However, rising raw material costs put pressure on operating margins.

Operating profit grew 46.1 per cent y-o-y to Rs 102.55 crore in the March 2007 quarter, while its total operational income expanded 71.8 per cent to Rs 818.2 crore.


Operating profit margin declined 220 basis points y-o-y to 12.5 per cent last quarter. This pressure on margins was owing to adjusted raw material costs as a percentage of total operational income rising 680 basis points y-o-y to 69.6 per cent in the last quarter.

In contrast, other engineering players such as BHEL and ABB saw their operating profit margin improve 185 basis points and 112 basis points y-o-y in the last quarter.

Thermax's order backlog was Rs 3,100 crore at the end of FY07, a growth of nearly 80 per cent y-o-y and in its key energy division, this includes captive power and co-generation orders to the tune of 265 mw. In FY07, Thermax's consolidated operating margin grew 150 basis points y-o-y to 12.4 per cent.

The company is investing about Rs 175 crore at Gujarat, to add substantially to its manufacturing capacity, in a bid to leverage strong demand conditions in the medium term.

However, Thermax's ability to manage raw material costs will also be crucial. At Rs 486, the stock trades at 21 times estimated FY08 earnings, given its strong growth prospects.