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Company Background

The West Coast Paper Mills Ltd (WCPL), promoted by Mr S.K. Bangur, CMD, is amongst India‟s leading manufacturer of paper & paper products at its integrated paper plant at Dandeli in Karnataka with an installed capacity of 330,000 TPA. Product portfolio includes various types of printing, writing and value-added papers. Its telecommunication cables business contributes ~6% to revenue. During FY20, WCPL acquired Andhra Paper Ltd (APL) (erstwhile International Paper APPM Ltd) which has an installed capacity of 241,000 MTPA.

Investment Rationale

Robust demand resulted in strong volumes and topline growth of ~26.1% y-o-y

* During Q4FY21 standalone WCPL and APL sales grew significantly by ~24% and ~30% y-o-y to Rs 5,748.6 mn and Rs 3,623.1 mn respectively, on the back of demand revival, which started in Q3FY21 and continued to gather momentum in Q4FY21, resulting in better volumes and realisation. Volumes of WCPL (standalone) were up by ~35% y-o-y and ~70% q-o-q at ~101,046 MT whereas APL volume improved by ~46% y-o-y and ~37% q-o-q at ~71,553 MT. Realisations of both WCPL and APL improved by ~2% and ~7% q-o-q to ~Rs 54,000/MT and ~Rs 51,000/MT respectively. However, realisation on a y-o-y basis declined by ~9% and ~11% respectively.

* Topline for FY21 for WPCL and APL declined by ~31% and ~30% at Rs 13,684 mn and Rs 8,867.5 mn respectively. With educational institutions remaining closed and people adopting safer working environments by working from home resulting in lower office activities, demand for W&P paper remained subdued, impacting the overall performance of the Company during FY21.

* With COVID-19 Second Wave induced lockdown in many states, the expectation of the start of return to normal business conditions for the Paper Industry during Q1FY22 has been impeded. With ease in lockdown restrictions, the management has hinted at improvement in demand from the third week of June 2021. Further, with vaccination drive picking up pace resulting in revival of the economy and gradual opening up of educational institutions, we expect business normalcy from H2FY22E onwards. Thus, the worst seems to be over for the paper industry in general and for WCPL and APL in particular and we expect gradual improvement in demand and realisation for W&P segment going forward.

* Imports from neighbouring countries have eased out. Additionally, pulp price has now stabilised at ~USD 800/MT from ~USD 450/MT in Q2FY21, making imports further competitive.

* Anti-dumping duty levied in 2018, on uncoated copiers, is about to expire in December 2021. Keeping this in view, India has initiated sunset review investigation on uncoated copier paper imported from Indonesia and Singapore. Management is optimistic that anti-dumping duty will be reinstated keeping in view the likelihood of dumping of cheap paper from Indonesia and Singapore, consequently harming the domestic Paper Industry.

* WCPL is well positioned for growth in coming years. We have built in a consolidated revenue growth of ~22% and ~17% for FY22E and FY23E respectively and keeping in view WCPL’s robust track record and expectations of rise in demand post ease of lockdown restrictions. Further, our estimates are contingent upon the future uncertainties of COVID-19 disruptions which might impact our forecasts.

EBITDA margins to stabilize in the vicinity of ~21.5%

* Standalone EBIDTA margin of WCPL and APL deteriorated by 600 bps and 700 bps at 17.7% and 16.4% respectively, during the quarter, due to rise in raw material consumed, as % to sales, on the back of rising input cost. Consolidated EBITDA margins, for the quarter deteriorated by 628 bps during the quarter at 17.4%. Paper division and Telecom cables division witnessed a consolidated profit of 11.9% and 7.6% respectively at EBIT level vis-à-vis 17.4% and 15.5% corresponding period last year. Going forward, we expect consolidated EBIDTA margins to stabilize in the vicinity of 21.5% in FY23E on the back of rise in volumes and realisation due to better paper demand.

* The Company witnessed a profit of ~Rs 749.2 mn at PAT level (consolidated) vis-à-vis Rs 1,199.3 mn last year on account of lower operating margin, ~31% decline in other income and positive income tax (which was negative in corresponding period last year). Interest cost also declined by ~62% y-o-y at Rs 101.2 mn. With the revival in demand going forward, we expect consolidated PAT margin to remain in the vicinity of 10.3% by FY23E.

Planned capex for high end duplex board worth Rs 5-7 bn

* The management is contemplating setting up a ~130,000 MTPA high end duplex board plant at Dandeli for a capex of ~5-7 bn. As of now, the Company has filed for environment clearance (EC) which is expected to be received in next 3-4 months, post which it will take ~18-24 months to get the plant commissioned. The Company current capacity is divided equally between copier paper, W&P paper and cup-stocks, comprising ~90% of total capacity. The said capex will increase the WCPL installed capacity to ~450,000 MTPA.

VALUATION

Indian paper industry was already impacted by a weakening macroeconomic environment and higher imports from neighbouring countries, which was further aggravated by COVID-19 pandemic. However, Indian Paper industry looks strong in the long term. With a rise in economic activity and gradual opening up of educational Institutions, the earnings are expected to witness a strong recovery from H2FY22E onwards.

The acquisition of APL will give a fillip to both topline and bottomline of consolidated WCPL in the long run. We have currently valued the stock on the basis of EV/EBIDTA of 4x of FY23E EBIDTA. With the expected recovery in paper demand and rise in realisation, we recommend a „Buy‟ on the stock with a target price of Rs 395 (upside of ~61%).

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