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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 ~24% over FY21-23E

* During Q1FY22, WCPL‟s consolidated net sales grew significantly by ~78% y-o-y and degrew by ~43% q-o-q at Rs 5,376 mn on the back of COVID-19 second wave induced lockdown in many states during April and May, thereby impacting volumes. Paper division grew by ~76% y-o-y at Rs 5,046.2 mn whereas cable division grew by ~426% y-o-y at Rs 830.1 mn respectively.

* Standalone WCPL and APL sales grew y-o-y by ~48 and ~114% at Rs 2,686.3 mn and Rs 2,584.2 mn, during the quarter whereas it de-grew by ~53% and ~29% q-o-q. Volumes of WCPL (standalone) were up by ~49% y-o-y and de-grew by ~58% q-o-q at ~42,000 MT whereas APL volume improved by ~116% y-o-y and de-grew by ~34% q-o-q at ~47,500 MT. Realisation of both WCPL and APL improved by ~8% and ~7% q-o-q to ~Rs 58,500/MT and ~Rs 54,400/MT respectively. However, realisation on a y-o-y basis remained muted.

* With educational institutions remaining closed and people adopting safer working environments by WFH resulting in lower office activities, demand for W&P paper remained subdued, impacting the overall performance. With the ease in lockdown restrictions, the industry has witnessed an improvement in demand from the 3rd week of June 2021. Further, with vaccination drive picking up pace resulting in revival of the economy and gradual opening up of the educational institutions, we expect business normalcy from H2FY22E onwards. Thus, the worst seems to be getting over soon 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.

* Anti-dumping duty levied in 2018, on uncoated copiers, is about to expire in December 2021. Keeping this in view, India has initiated a sunset review investigation on uncoated copier paper imported from Indonesia and Singapore. Industry is optimistic that antidumping 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 ~34% and ~14% 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 ~23.3%

* During Q1FY22, standalone EBIDTA margin of WCPL and APL improved by 660 bps and 2,710 bps at 20.9% and 16.1% respectively led by better volumes and prudent operating cost management by the Company. Consolidated EBITDA margins, for the quarter improved by 1,511 bps at 18.6%. Paper division and Telecom cables division witnessed a consolidated profit of 11.9% y-o-y and 2.9% y-o-y respectively at EBIT level. Going forward, we expect consolidated EBIDTA margins to stabilize in the vicinity of ~23%+ in FY23E on the back of rise in volumes and realisation due to better paper demand.

* PAT (consolidated) for the quarter stood at ~Rs 319.4 mn against loss of Rs 396.3 mn last year led by better operating margin and ~138% increase in other income. Interest cost also declined by ~9% y-o-y at Rs 183.4 mn. With the revival in demand going forward, we expect consolidated PAT margin to remain in the vicinity of 12% 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 ~Rs 5-7 bn. As of now, the Company has filed for environment clearance (EC) which is expected to be received in next few 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 431 (upside of ~76%).

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