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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 ~8% 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

Consolidated topline to grow with a CAGR of ~19% over FY21-24E

* During Q2FY22, WCPL’s consolidated net sales grew significantly by ~110% y-o-y and ~68% q-oq at Rs 9,004.9 mn on the back of demand revival post opening up of the economy after COVID19 second wave, resulting in better volumes and realisation. Paper division grew by ~110% y-o-y at Rs 8,642.8 mn whereas cable division grew by ~102% y-o-y at Rs 359.5 mn respectively.

* Standalone WCPL and APL sales grew y-o-y by ~100% and ~126% at Rs 5,502.8 mn and Rs 3,494 mn, during the quarter whereas it grew by ~105% and ~35% q-o-q. Volumes of WCPL (standalone) were up by ~96% y-o-y and ~114% q-o-q at ~90,000 MT whereas APL volume improved by ~110% y-o-y and ~32% q-o-q at ~62,500 MT.

* Realisation of both WCP and APL improved by ~2.3% and ~7.8% y-o-y to ~Rs 57,250/MT and ~Rs 56,000/MT respectively. Current realisation for WPP and Copier is in the range of ~Rs 61,000 – Rs 64,000 / MT and ~Rs 66,000 – 69,000 / MT.

* W&P and Copier segment, which was negatively impacted (demand and realisation) due to closure of Educational Institutions and prevailing ‘working from home’ practice, since the outbreak of COVID-19 pandemic, has started witnessing a turnaround with schools opening in various states, on-going festive season demand and traction from publishers and notebook manufacturers on back of receding threat of third wave of COVID-19 due to successful implementation of vaccination drive in India. Further, prolonged delay in arrival of imported paper due to on-going global logistics issues (unavailability of containers) and exponential rise in freight cost augurs well for the domestic paper manufacturers in general and WCPL & APL in particular.

* Anti-dumping duty (ADD) levied in 2018, on uncoated copiers, is about to expire in December 2021. On demand of the industry and after conducting sunset review investigation on imported uncoated copier paper, Ministry of Finance, GoI has extended the ADD on copier paper till February 28, 2022.

* WCPL is well positioned for growth in coming years. We have built in a consolidated revenue growth of ~51%, ~8% and ~2.5% for FY22E, FY23E and FY24E respectively keeping in view WCPL’s robust track record and expectations of rise in demand post opening up of economy and Educational Institutional.

Consolidated EBITDA margins to stabilize in the vicinity of ~23%

* During Q2FY22, standalone EBIDTA margin of WCPL and APL improved by 1,140 bps and 1,120 bps at 18.9% and 10.1% respectively. However it declined by 600 bps and 190 bps q-o-q respectively on account of higher cost especially pulp, coal, chemicals, caustic soda and logistic costs. However, in order to mitigate the cost inflation, the Company has taken several price hikes and a further price hike going forward can’t be ruled out. On an average the Company has taken price hike of ~3-5% in Q2FY22 and another ~5-7% hike is undertaken effective November 2021.

* Consolidated EBITDA margins, for the quarter improved by 1,107 bps y-o-y and declined by ~283 bps q-o-q at 15.8%. Paper division and Telecom cables division witnessed a consolidated profit of 9.9% y-o-y and 8.5% y-o-y respectively at EBIT level. Going forward, we expect consolidated EBIDTA margins to stabilize in the vicinity of ~23% in FY24E on the back of rise in volumes and realisation due to better paper demand.

* PAT (consolidated) for the quarter stood at ~Rs 724.8 mn against loss of Rs 355.2 mn last year led by better operating margin and ~100% increase in other income. Interest cost also declined by ~38% y-o-y at Rs 113.9 mn. With the revival in demand going forward, we expect consolidated PAT margin to remain in the vicinity of 11.7% by FY24E.

Planned capex for high end duplex board worth Rs ~10+ bn

* The management is contemplating setting up a ~130,000 MTPA high-end integrated (including pulp) duplex board plant at Dandeli for a capex of ~Rs 10+ bn which will take minimum 2.5-3 years from now. As of now, the Company has filed for environment clearance (EC) which is expected to be received in next few quarters, post which it will take ~18-24 months to get the plant commissioned. At full capacity utilization, this capex has a potential to generate additional EBITDA of ~ Rs 1.8-2 bn. 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 WCPL installed capacity to ~450,000 MTPA and total capacity (consolidated) to ~7,00,000 TPA.

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 4.5x of FY24E 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 429 (upside of ~62%).

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