* TNPL is adding capacities in a phased manner in years 2021-2024, leading to healthy multiyear organic growth.
* Adequate water availability resulting from heavy rainfall in Tamil Nadu and release of water from Cauvery/Mettur dams due to sufficient rainfall in Karnataka will help overcome production closure and maintain normal production.
* Levy of 10% import duty on newsprint in the recent Union Budget will help raise and sustain realisations.
* Closure of some paper plants in China could help improve demand supply situation for paper manufacturers.
* Improving margin profile in Q1FY20 portend better times ahead.
* Softer demand from the FMCG sector in FY20 remains a concern, as this sector is one of the main consumers of MCPB.
* Water crisis/availability in Tamil Nadu can recur in future, which might affect paper production in future.
* Slow industry growth in writing paper industry due to various structural shifts in usage patterns, is a challenge for TNPL.
* High gearing and modest debt protection ratios.
* Exposed to project implementation risks.
Tamil Nadu Newsprint and Papers Limited (TNPL) is engaged in the business of printing and writing paper and paperboards. The company has two units in Tamil Nadu. The Company's segments include paper, energy and cement. It manufactures printing and writing papers in substances ranging from 50 grams per square meter (GSM) to 110 GSM. TNPL Copier Brand has become a household name. The Company has a total annual capacity of approximately 6,00,000 metric tons (MT) per annum (production 609569 MT in FY19). The Company also exports its products to over 50 countries. In FY19, exports accounted for 13.5% of sales. TNPL is the second largest player in the domestic WPP segment. It has strong market position supported by its established brand, diversified product portfolio and customer base, wide distribution network and regular capacity expansions. The State Govt of Tamilnadu holds 35.3% stake in TNPL.
View and valuation:
* TNPL seems to be in a sweet spot with most factors now in its favour. Customs duty, ADD (anti-dumping duty) have led to better realisations, while bagasse availability is better and coal prices have moderated. Capacity expansion plans could provide it with organic growth from FY22. Its established brand, strong distribution network and diversified product portfolio/customer base will help register good growth going forward.
* It will also benefit out of structural tailwinds - the waste paper import ban in China, global restrictions on single-use plastic, deforestation and the emergence of e-commerce. Increasing awareness among consumers towards eco-friendly and sustainable packaging options along with increasing trend towards reducing the use of plastic has led to a sustained demand for paper and board packaging. Increase in literacy rate and increasing enrolment in education could lead to higher demand of paper in India. When globally, paper consumption has witnessed negative / stagnant growth, in India the past few years has been very strong. With increasing income levels and urbanization per capita paper consumption in the country will gradually improve resulting in higher demand mainly in consumer paper grades like Writing and Printing with various endapplications like text book publishing, Student Notebooks, cut-size paper for photo copier and inkjet printers.
We feel investors could buy the stock at the CMP and add on declines to Rs.169-173 band (~5.7x FY21E EPS) for sequential targets of Rs.215.5 (7.2x FY21E EPS) and Rs.237.5 (8.0x FY21E EPS) in 3-4 quarters.
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