Rainbow Paper Ltd[1]

8/6/2019 Rainbow Paper Ltd[1]

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March 9, 2011

Rainbow Papers Ltd.

… creating wealth from waste

SKP Securities Ltd www.skpmoneywise.com Page 1 of 1

Outlook & Recommendation

The demand for paper is influenced by various macro-economic factors such anational economic growth, industrial production, promotional expenditure

population growth and the Government’s allocation for the education secto

Domestic demand for paper is expected to grow at a CAGR of 11% in next 3-4

years. RPL would be among the few players in India manufacturing all kind o

papers once the PM VIII is commissioned in April 2011.

At the current market price of ` 54, the stock is undervalued based on discounte

free cash flow approach. We recommend BUY rating on the stock with a targe

price of ` 91/- (68% upside) in 18 months.

CMP ` 54 Target ` 91 Initiating Coverage - BUY

Key Share Data

Face Value ( ` ) 2.0

Equity Capital ( ` mn) 174.4

Market. Capitalization ( `

mn) 462252-wk High / Low ( ` ) 65/24

Average Daily Volume 116348

BSE code 523523

NSE code RAINBOWPAP

Reuters code RNBP.BO

Bloomberg code RBWP IN

Shareholding Pattern – December 31, 2010

Consolidated Financials ( ` mn)

FY10 FY11E FY12E FY13E

Net Sales 2740.7 4076.1 6785.7 8887.8

Sales Gr 18% 49% 66% 31%

EBIDTA 628.5 904.9 1553.9 2097.5

PAT 235.9 409.9 761.0 1073.5

PAT Gr -0.1% 73.8% 85.7% 41.1%

EPS ( ` ) 2.7 4.7 8.7 12.3

CEPS ( ` ) 5.5 7.9 13.2 18.2

Key Financial Ratios

FY10 FY11E FY12E FY13E

Int Cover (x) 3.0 3.4 5.1 8.6

P/E (x) 20.0 11.5 6.2 4.4

P/BV (x) 2.1 1.8 1.5 1.2

P/Cash EPS 20.3 14.0 8.0 6.1

MCap/Sales 0.3 0.2 0.1 0.1

EV/EBIDTA 15.0 10.9 9.5 5.2

ROCE 7.0% 8.8% 14.6% 20.4%

ROE 10.6% 16.0% 23.9% 26.3%

EBITDM(%) 22.9% 22.2% 22.9% 23.6%

NPM (%) 8.6% 10.1% 11.2% 12.1%

Debt-Equity 1.5 1.8 1.4 0.9

Performance comparison RPL v/s BSE Smallcap

Source: Capitaline

Analyst: Vineet P. Agrawal

Tel No.: +91 22 2281 9012; Mobile: +91 9819510575

Email: [email protected]

Rainbow Papers Ltd (RPL) is the producer of 186 varieties of paper in India based

in Gujarat. The company was focused at industrial paper till date, but after the

installing of PM VIII machine, it will also get access to value added papers such as

glazed news print and specialty papers. The current capacity of the company is

183,000 MTPA which will get increased to 305,000 MTPA after the aboveinstallation. The company not only caters to the domestic markets but also has

registered its presence in international markets such as USA, Middle East, South

Africa and UK.

Investment Rationale

Increasing capacity to meet growing demand

The paper industry is expected to grow with the CAGR of 11% over next

3-4 years.

RPL is undergoing capacity expansion plan to cater the growing demand,

with the estimated cost of ` 6.3 bn. The capex is divided in two phases.Phase – I is already commissioned in FY10.

Phase – II with the estimated cost of ` 3.3 bn is expected to be

commissioned by April 2011.

RPL will get access to value added papers after completion of Phase – II.

Topline to grow at a CAGR of whooping 48% during the next 2-3 years:

Topline of RPL has grown with the CAGR of 23% in the past three years

It is further expected to grow by 48% in 2-3 years. The demand driversare-

Government focus on education;

growing organized retail;

growing middle class – changing lifestyle – creatingdemand for consumer durables, FMCG and other

products.

Increasing margins with the focus on value added products:

EBIDTA and PAT margin is expected to increase to around 24% and 12respectively with the company now focusing upon value added produc

These value added paper enjoys higher realisations as compared

industrial papers. Currently it enjoys the margin of around 22% at EBIDTA levels and 11%

PAT level during 9MFY11.

30%

7%

61% 2%

Promoters Institutions

P ublic Othe rs Source: Capitaline

-20%

0%

20 %

40 %

60 %

80 %

100%

120%

140%

M a r - 1 0

M a y- 1 0

J u l - 1 0

S e p- 1 0

N o v- 1 0

J a n- 1 1

M a r - 1 1

RPL

BSE SMALLCAP

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Rainbow Papers Ltd.

SKP Securities Ltd. www.skpmoneywise.com Page 2 of 14

The Company: An Introduction

Rainbow Papers Ltd (RPL) was established in 1981 with its first venture of a creping and dyingmachine having production capacity of 6,000 MTPA. Today, it is one of the fastest growing company producing almost 186 different varieties of paper catering to diverse segment of the Indian as well asoverseas usage markets. The paper manufactured by the company can be broadly categorized as below:

Category Varieties Application Illustration

Red Maplitho WPP High quality premium note books

Normal NewsprintNews papers

Coated Paper Glazed news print*

Non-carbon Paper WPP Pay-in slips in banks

Light Weighted

CoatedWPP Magazines

Crepe Papers Packaging & Insulation

Industrial paper

Duplex Paper &

Bristol Paper

Paper Board Packaging

Packaging

Coated Paper Packaging

Specialty Paper*

Writing & Printing Paper (WPP)

Creamwove WPP

Newsprint

Crepe papers are meant for high qualitypackaging; Tissue crepe is used for

decorative purposes; Electric Grade

Crepe is used for insulation of Oil Filled

Transformers and Cables

For making cartons; Also used as filler in

packaging

Used in packaging of many everyday

consumer products such as Pizza Boxes,

toothpaste boxes, butter, notebook etc

Soap Rapper, Pharmaceuticals

packaging and boxes etc

Book covers, Leaflets, Magazines,

brochures, Annual reports, hoardings,

stickers, invitation cards, greeting cards

etc.

WPPCoated Paper

Used in thermal printers and

particularly in cheap light weight

devices such as adding machines, cash

machines, credit card terminals etc

WPPThermal Paper

Computer stationary, textbook, writing

books etc

Source: Company & SKP Research; *The Company will start producing glazed news print and specialty paper after commissioning of PM VIII news print machine in FY12

• Infrastructure: The Company has its state-of –the-art manufacturing facility at Village Rajpur,near Ahmedabad, Gujarat, with the total installed capacity of 1,83,000 MTPA. The company is

in the process of further adding 1,22,000 MTPA of paper capacity which will provide thecompany the access to value added products like glazed news print and specialty paper.

• The company also has a coating division for manufacturing coated papers. The total installedcapacity is 12,000 MTPA which will enhance to 36,000 MTPA post expansion in FY12.

• The plant is located near Mundra port ensuring steady raw material supply of waste paper withlower freight cost. It also provides easy access to international markets such as Middle East andAfrica.





Rainbow Papers Ltd.


Canadian Waste Paper Index

24000

25000

26000

27000

28000

29000

30000

31000

32000

M a r - 1 0

A p r - 1 0

M a y- 1 0

J u n- 1 0

J u l - 1 0

A u g- 1 0

S e p- 1 0

O c t - 1 0

N o v- 1 0

D e c - 1 0

J a n- 1 1

F e b - 1 1

• RPL has installed captive power plant of 5 MW in 2004. The capacity was further increased to10 MW in 2007. Today, it has the total capacity of 15 MW which fulfills all the present need of electricity of its plant.

• Geographic reach: 80% of RPL’s total production is consumed in domestic markets and rest isexported. The Company is exporting its product to countries such as USA, Middle East, South

Africa, South East Asia, Indonesia, France, Sri Lanka and United Kingdom.

• Strong dealer network: The Company has a strong dealer network with more than 60 dealersspread across Maharashtra, Gujarat and Central India.

• Esteemed clients: Reputed client base of RPL includes Nirma, Navneet Publications, Samrat News Paper, Hindustan Unilever, Colgate Palmolive and many more. RPL also caters to variousstate education boards and other Government bodies such as NCERT, IGNOU etc.

Raw Materials

Waste Paper:

• Wood fiber - the primary input: The primary input for the manufacturing of paper is woodfiber which is derived either from forest wood or agri residue or waste paper. Wood accounts for 37% of total production in India while agri residue and waste paper accounts for 32% and 31%respectively.

• Waste Paper – the major input for RPL: RPL manufactures paper from waste paper. Almost50% of the waste paper is imported either from Canada or Indonesia. Reasons for imports are:

India’s per capita consumption of paper is lowest at 9 kg per person against globalaverage 58 kg per person resulting in lower quantity of waste paper;

Poor waste paper collection mechanism in India; Multiple usage of paper before recycling; and Imported waste paper offers better quality paper.

• Waste paper cost mainly includes collection centre cost and freight. Raw materials costs as a percentage of sales ranges between 48%-50% for the company.

• Fluctuating prices: Increase in waste paper prices between 2009 and 2010 is given below: Prices in US $ (Per ton) 2009 2010 % Change

Old News Paper 175 275 57.1%

Old Corrugated Cartons 170 320 88.2%

Mixed Waste 130 210 61.5%

Pulp 480 610 27.1%

Source: The Hindu Business Line

• Waste Paper Compositeindex shows fall in pricesfrom March:

Source: http://www.trianglepaper.org





Rainbow Papers Ltd.


• Waste paper cost of the company fluctuates around ` 10-12 per kg mainly due to fluctuation of freight charges which basically is the derivative of crude price fluctuation.

• Increasing demand: The demand for waste paper is increasing year on year not only due to risein the consumption of paper but also the policy change of various Governments regarding paper manufacturing.

Demand for waste paper from China is increasing because now it is focusing onrecycling of paper and shutting its wood pulp mills. China has added over 6 mn tonesto its usual waste paper imports in 2010 as compared to about 26 mn tons annually.

The US and European countries too are giving a policy push to recycle waste paper to address conservation issues.

The demand for waste paper is also growing in the US. The US has suspended a taxcredit subsidy to pulp mills for the use of black liquor as an alternative fuel. Thissubsidy runs into several billion dollars, given to the pulp till last year. It will meanthat manufacturers will cut back on forest sources of wood fiber and increase the useof recycled paper. This will step up the demand for waste paper.

India will have to step up its waste paper collection system as the US and Europe are steppingup waste paper usage and cutting down on virgin wood pulp use.

• Import duty cut in Budget 2012: Government has reduced import duty on waste papers from5% to 2.5% in Budget 2012 to enhance the usage of waste paper in paper manufacturing.

Chemicals:

• Apart from the wood fiber, certain chemicals are also used for manufacturing paper. Thesechemicals are basically used to manufacture coated papers and deinking of waste papers.

• Chemicals are used as pigments, adhesives and chemical additives for manufacturing coated papers whereas they are used for pH control, bleaching etc in deinking of papers.

• Chemical cost as a percentage of sales ranges between 5%-10% for the company.

• Some of the chemicals used in manufacturing papers are given below:

Process Chemicals Used as Purpose

Coated Paper China clay Pigments Ensures Glossyness

Calcium Carbonate Pigments Used as a Filler

Titanium dioxide Pigments Provides whiteness and opacity

Silica Pigments provides shine and smoothness

Styrene Butadine Adhesives provides good aging stability

Starches Adhesives Provides strength

Resins and PE Chemical Additives Provides water resistance and wer strength

Deinking Sodium silicate/hydroxide -- for pH Control

Hydrogen Peroxide -- for Bleaching

Calcium Chloride -- for Calcium ion source

Fatty Acid -- as collector Source: SKP Research Desk





Rainbow Papers Ltd.


Investment Rationale

1. Increasing Capacity to meet growing industry demand:

• The current Indian paper industry size is about ` 317 bn which is expected to grow with theCAGR of around 11% by FY2014-15 to ` 526 bn. The growth will be fuelled by strongindustrial and economic growth.

• WPP is likely to be the largest contributor with the market share of 42% followed by paperboardat 39%. Demand for WPP segment is expected to rise with the CAGR of 7.6% till FY2014-15 ascompared to CAGR of 6.5% during the last five years.

• Foreseeing the expected growth in the demand in the paper especially in WPP, RPL has plannedto increase its paper capacity from 102,000 MTPA in FY09 to 305,000 MTPA in April 2011.

• The company has imported two paper plants of Voith make from Germany. The estimated costof expansion is ` 6.3 bn. The cost includes:

installation of German automated paper machine, installation of 20 MW thermal power plant, deinking plant, and

technology upgradation.

• The project is divided in two phases details of which are given below:

Expansion Phase-I Phase-II

Capacity Enhancement 81,000 MTPA 122,000 MTPA

Installation PM - VII, Voith make paper machine PM - VIII, Voith make paper machine

Deinking Plant Deinking Plant

20 MW captive power plant

Estimated Cost ` 3.05 bn ` 3.27 bn

Commissioning Already commissioned in Oct 2009 Expected in April 2011

Source: Company

• RPL will get access to certain value added products like glazed news print and specialty paperswith the completion of Phase - II.

• Both, Phase - I and Phase - II are funded through debt and internal accruals. Phase I has already been commissioned. The company has raised GDRs worth ` 1.23 bn and tied up with theconsortium of eight banks for the loan of ` 2 bn and rest from internal accruals, for Phase - II.

2. Topline to grow at a CAGR of whooping 48% during the next three years:

• RPL’s topline has seen handsome CAGR growth of 23% for the past three years. Revenues posted by the company for FY10 was ` 27.4 bn, which we expect to touch ` 88.9 bn by the end

of FY13 with the CAGR growth rate of 48% due to strong economical and industrial growth.

• The growth will be fuelled by:

Government focus on education:

India has the world’s second largest student population with an estimated student baseof 232 mn in schools and 15.5 mn in colleges. As per BCG Group a global shortage of





Rainbow Papers Ltd.


56 mn people in the working age group is expected by 2020 due to demographic shifts.On the contrary, India would have surplus of 47 million working population.

Keeping this in view, Government, both at central and State levels and private sector are expected to increasingly invest in educational infrastructures in all stages includingschools, higher education institutions and skills development center.

During the 11th Five Year Plan the Government envisaged an outlay of ` 2700 bntowards the education sector, a four fold increase over the allocation of 10 th Five Year Plan.

Budget 2012 provisions: The Government provided ` 520.6 bn for education sector inthe Budget – 2012. Apart from this it has also proposed to introduce scholarshipscheme to the students of SC/ST appearing in standard IX and X inducing them tostudy further.

All these efforts from the Government are expected to boost the demand for WPP

benefiting companies like RPL.

Growing Organized Retail: The BMI India Retail Report for the first-quarter of 2011 forecasts that total retail sales

will grow from US$ 392.63 billion in 2011 to US$ 674.37 billion by 2014. Strongunderlying economic growth, population expansion, the increasing wealth of individuals and the rapid construction of organized retail infrastructure are key factors behind the forecast growth.

There will also be opportunities in India's tier II and III cities with the expandingmiddle and upper class consumer base.

According to a report titled 'India Organized Retail Market 2010', published by KnightFrank India in May 2010 during 2010-12, around 55 mn sq ft of retail space will beready in Mumbai, national capital region (NCR), Bengaluru, Kolkata, Chennai,

Hyderabad and Pune. Besides, between 2010 and 2012, the organised retail real estatestock will grow from the existing 41mn sq ft to 95 mn sq ft.

The increasing penetration of organized retail and the increasing preference for branded products are fuelling the demand for the products of the company. These

organized retailers use virgin grade packaging boards which stimulate their demand.

Increasing penetration of organized retail also creates demand for thermal paper as

it is widely used by these retailers for billing.

Increasing purchasing power of Indian middle class – creating demand for consumer

durables, FMCG, textiles and so on:

India’s per capita income has increased by 10.5% to ` 44,345 in FY10 from ` 40,141 inFY09. This growth is the indicative of increased spending power of the consumer. Thelevels of aspirations have increased in the today’s youth, with the rising trend of younger professionals that start earning early in life.

According to a study by the McKinsey Global Institute (MGI), released in May 2007,India's middle class will swell by more than ten times—from 50 mn in 2007 to 583 mn people by 2025. By 2025, India will also become the 5th largest consumer market,moving up from the 12th position it occupied in 2007.





Rainbow Papers Ltd.


This increasing purchasing power gives rise to the demand for FMCG products andconsumer durables. The Indian FMCG sector, with a market size of US$ 25 billion(2007–08 retail sales), constitutes 2.15% of India's gross domestic product (GDP).India is recognized as a cost-effective quality manufacturing base in the world market.Food products are the largest consumption category in India, accounting for nearly 21 per cent of the country’s GDP. The industry is poised to grow between 10 to 12%

annually.

Demand for FMCG products, consumer durables, textiles etc increases with the

increasing purchasing power of the middle class which in turn creates the demand for

packaging paper such as Kraft paper.

3. Increasing margins with the focus on value added products:• The revenues of the company are expected to be evenly divided among its industrial paper and

other paper (WPP, News paper and value added paper) segment after the completion of Phase – II expansion mentioned earlier.

• The company was largely focused upon paper boards for generating revenues prior to thisexpansion. The commissioning of PM VIII automated Voith make paper machine will providethe company the access to number of value added products such as glazed newsprint, lightweighted coated paper, non-carbon paper, thermal paper, coated paper and crepe paper.

• Sales mix (volume wise) of the company at a glance:

Before Phase - II (FY10)

71%

14%

9%

6%

Paper Board

News Print

WPP

Value Added

(Coated) Paper

After Phase-II

29%

15%

12%

44% Paper Board

WPP

News Paper

Value Added Paper

Source: Company & SKP Research Desk

• These value added papers fetches high realisations vis-à-vis industrial packaging papers, thusenhancing margins of the company. Realisations at a glance:

Paper Category Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11

Duplex Boards

Duplex Board Grey Back 20 20 22 22 25 26 26

Manila, Colour Kraft and Colour Board 26 27 26 27 29 30 31

Duplex Board White Back 25 25 25 27 30 31 32

Other Grade 19 17 13 15 29 20 20

Average Duplex Board 21 21 21 22 25 26 26

News Print NA NA 23 23 25 25 27

WPP 38 38 34 33 35 35 38

Coated Papers (Value Added) 44 45 42 44 43 43 45

Source: Company





Rainbow Papers Ltd.


• Average realisations per KG for the Q1FY11, Q2FY11 and Q3FY11 were ` 27.1, ` 26.9 and ` 29 respectively which we expect to reach gradually to ` 33 by FY13 with the improvement in

product mix.

• We expect the EBIDTA margins and OPM to improve from 22.9% and 14.2% in FY10 to

23.6% and 17.3% in FY13.

• The graph below shows the journey of margins of RPL:

16.1%

20.6% 21.3%22.9% 22.2% 22.9%

23.6%

9.2%

13.6%

10.5%

14.2% 15.3%16.2%

17.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

FY07 FY08 FY09 FY10 FY11E FY12E FY13E

EBIDTA Margin (%) OPM (%)


4. Reducing Debt – Favorable D/E:

• Since RPL’s expansion plans will get over by the beginning of FY12 and there are no further plans for expansion (till date) we expect reduction in term loans in the books with therepayment. Term loans, which stood at ` 2,438 mn in FY10, is expected to reduce to ` 2,100 mnin FY13.

• We expect D/E to stabilize around 0.9x by the end of FY13 from 1.5x in FY10 with the

improving shareholders fund and reducing term loans.

Debts and D/E Interest Cost & Interest Coverage

Source: Company & SKP Research

0

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Rainbow Papers Ltd.


5. Near zero wastage of raw material:

• RPL has adopted the policy of near zero wastage of raw material by usage of sludge, plasticwaste and fly ash for manufacturing innovative products having applications in variedindustries.

• Sludge is the semi-solid material leftover of the processed wastepaper. Following is the various

innovative usage of sludge, plastic waste and fly ash:

Residue Material Source Innovation Application

Sludge Obtained while manufacturing from recycled fiber Paper Board Substitute of wood for manufacturing furniture

Fly Ash by-product of captive power plant Bricks Packaging

Plastic Sheets - plain

and corrugattedSegregated during waste paper processingPlastic Waste Thached roof

• The plants for the above products were installed in December 2010. We expect the above

product to contribute around ` 130 mn – ` 140 mn every year to the revenues of the company.

• Such efforts made by the company add to the profitability of the company with marginal

production cost and also eliminates the problem of waste disposal.

Key Concerns

1. Inadequate availability of virgin fiber:• Availability of virgin fiber is inadequate resulting in high cost of raw materials including wood,

non-wood and waste paper.

• RPL’s performance may suffer due to no availability or inadequacy of waste paper.

2. Price volatility of waste paper:

• As mentioned earlier, waste Paper is the key raw material for the company, 50% of which is to

be imported due to lack of proper collection infrastructure and low per capita consumption inIndia.

• This makes RPL exposed not only to freight rate fluctuation risk due to crude oil pricefluctuation but also the currency risk. Any adverse movement in the prices may put negativeimpact on the margins of the company.

3. Fragmented Industry – high competition:

• The domestic paper industry is highly fragmented. The estimated number of mills in India varies between 500 to over 1,000 with small size of paper mills.

• Mills with the capacity of around 7,500 MTPA is considered small mill and the mills with the

capacity of over 33,000 MTPA is considered big mills in India.

• Nearly 45% of paper mill in India are small units which are largely present in lower end of paper product segments such as unbleached kraft paper, duplex board, creamwove paper andnews print.

• Thus, this makes the competition relatively higher within these products.

Source: Company





Rainbow Papers Ltd.


4. Substitution Threat:

• Paper competes with the products such as polymers and steel especially in industrial paper segment. Polymer poses the threat due to its being cheaper in comparison to paper. Its durabilityand appearance are also far better than paper.

• Similarly, WPP faces threat with increasing thrust for online storage of data.

Peer Set

• As mentioned earlier, Indian paper industry is the highly fragmented industry with small size of paper mills.

• The top five paper producers account for 20-23% of market share, approximately. Given beloware brief of some of the prominent organized players in the industry:

Players Paper Category EBIDTA/Ton D/E P/E EV/EBIDTA

(All FY10 figures) ` (x) (x) (x)

Andhra Pradesh Paper Mills Paper & Paper Board 8,627 1.2 4.9 4.9West Coast Papers WPP & Paper Board 6,780 2.1 8.3 12.6

K Paper WPP, Industrial Paper & Copier 9,573 1.4 4.5 3.7

RPL WPP, Industrial & Speciality Papers 5,771 1.5 20.0* 15.0

3.5N R Agarwal Industries WPP, Newsprint Industrial Paper &

Mechanical and chemical pulps

2,869 1.5 2.8

Source: Capitaline and SKP Research Desk; * due to stock split of FV ` 10 each to ` 2 each during FY10





Rainbow Papers Ltd.


Financial Outlook

Top-line to grow at a CAGR of 48% in the coming

2-3 years: Net sales have gone up to ` 2.7 bn for FY10 by registering a growth of 18% due to improved

realisations and higher volumes due to improveddemand from the user industry.

We expect the topline to grow at a CAGR of 48% in

the coming 2-3 years, led by better realisations of valueadded papers and higher volumes due to commissioningof new capacities.

Improving margins: RPL has witnessed EBITDA margin of 22.9% in FY10 due to improved realisations.We expect margin to improve to 23.6% during the next 2-3 years on account of higher realisations

enjoyed by value added paper products.

PAT margin has declined to 8.6% in FY10 vis-à-vis 10.2% last year. We expect PAT margin to increase to

12.1% by FY13. EPS of the company is expected to grow from ` 2.7 in FY10 to ` 12.3 in FY13.

2.32.7

6.8

8.9

4.1

0

1

2

3

4

5

6

7

8

9

10

FY09 FY10 FY11E FY12E FY13E

N e t S a l e s ( R s b n )

CAGR: 48%


493

629

905

1554

21.3%

22.9%

22.2%

22.9%

23.6%

0

200

400

600

800

1000

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1400

1600

1800

2000


E B I D T A ( R s m n )

21.0%

21.5%

22.0%

22.5%

23.0%

23.5%

24.0%

E B I D T A M a r g i n s ( % )


236 236

410

1074

761

12.1%

11.2%

10.1%

8.6%

10.2%

0

200

400

600

800

1000

1200


P A T ( R s m n )

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

P A T M a r g i n ( % )SIEmergingMarketsPDF in-citibank from 192.193.160.10 on 2011-06-01 07:51:05 EDT. DownloadPDF.




Rainbow Papers Ltd.


Demand for paper and paper products has renewed with the strong rebound of the India and globaleconomy. Domestic demand for paper is expected to grow with the CAGR of 11% in next 3-4 years. RPLwould be among the few players in India manufacturing all kind of papers once the PM VIII iscommissioned in April 2011.

At the current market price of ` 54, the stock is undervalued based on discounted free cash flow approach. We recommend BUY rating on the stock with a target price of ` 91/- (68% upside) in 18 months.

Assumed Terminal Year FY20

NOPLAT at Terminal Year ( ` mn) 1,472.1

Cost of Equity (%) 19%

WACC (%) 9.4%

Discounted Terminal Value ( ` mn) 6,599.9

Present Value of FCFF till Terminal Year ( ` mn) 3,438.2

Enterprise Value to Firm ( ` mn) 10,038.0

Less Debt ( ` mn) 3,357.7

Add Cash ( ` mn) 1,215.3

Present Value of Equity ( ` mn) 7,895.6

No. of Equity Shares (mn) Fair Value ( ` ) 90.5

Valuation

Source: SKP Research Desk





Rainbow Papers Ltd.


Income Statement

Particulars FY10 FY11E FY12E FY13E

Net sales 2740.7 4076.1 6785.7 8887.8

Growth (%) 18.2% 48.7% 66.5% 31%

Material Consumed 1164.2 1976.9 3257.2 4221.7

Chemicals Consumed 150.4 224.2 359.6 453.3

Personnel Expenses 77.8 114.1 190.0 248.9

Other Expenditure 576.9 856.0 1425.0 1866.4

EBIDTA 628.5 904.9 1553.9 2097.5

EBIDTA Margin (%) 22.9% 22.2% 22.9% 23.6%

Growth (%) 27.4% 44.0% 71.7% 35%

Depreciation 240.3 282.6 453.6 510.7

EBIT 388.2 622.3 1100.5 1586.8

EBIT Margin (%) 14.2% 15.3% 16.2% 17.9%

Growth (%) 59.4% 60.3% 76.9% 44.2%

Interest 129.0 180.8 217.2 184.8

Other Income 52.1 40.8 67.9 88.9

EBT 311.4 482.2 951.2 1490.9

Tax 75.5 72.3 190.2 417.5PAT 235.9 409.9 761.0 1073.5

PAT Margin (%) 8.6% 10.1% 11.2% 12.1%

Growth (%) -0.1% 73.8% 85.7% 41.1%

EPS (Rs.) 2.7 4.7 8.7 12.3

Balance Sheet


Equity Capital 174.4 174.4 174.4 174.4

Reserves 2043.8 2383.0 3012.7 3901.0

Net worth 2218.2 2557.4 3187.2 4075.5

Long-term Loan 3357.1 4520.6 4343.2 3695.4

Deferred Tax Liab. 142.1 142.1 142.1 142.1

Total Liabilities 5718.1 7220.1 7672.4 7913.

Net Fixed Assets 3140.1 2857.5 5674.4 5163.7

Capital WIP 1120.3 3270.3 0.0 0.0

Investments 0.2 0.2 0.2 0.2

Inventories 336.6 501.4 882.1 1093.2

Accounts receivable 394.4 570.7 916.1 1333

Cash & Bank 1215.3 633.9 969.8 1282.1

Other Current Assets 0.0 0.0 0.0 0.0

Loan & Advances 332.5 529.9 882.1 1155.4

Current Assets 2278.8 2235.8 3650.2 4863.9

Account payables 661.8 984.2 1492.9 1955.

Other Current Liab 0.0 0.0 0.0 0.0Provisions 160.0 159.6 159.6 159.6

Curr. liab. & prov. 821.8 1143.8 1652.4 2114.9

Net Current Assets 1457.0 1092.1 1997.8 2749.0

Total Assets 5718.1 7220.1 7672.4 7913

Cash Flow Statement


Profit before Tax 311.4 482.2 951.2 1490.9 Add: Depreciation, Int. &Other Expenses 359.9 463.4 670.6 695.5Net changes in WC, taxinterest -87.2 -288.3 -760 -856.6

Cash flow from operatingactivities 584.1 657.4 861.7 1330.0

Capita l expenditure -1114.6 -2150.0 0.0 0.0Investments, Sales of FA,Div. Recd & others 32.1 0.0 0.0 0.0Cash flow from investingactivities -1082.5 -2150.0 0.0 0.0Cash flow from financingactivities 1585.3 911.3 -525.8 -1017.7

Net Increase/Decrease inCash & Cash Equivalents 1086.9 -581.3 335.9 312.3

Opening Cash Balance 128.4 1215.3 633.9 969.8Closing Cash Balance 1215.3 633.9 969.8 1282.1

Key Ratios


Valuation Ratios

P/E 20.0 11.5 6.2 4.4P/Cash EPS 20.3 14.0 8.0 6.1P/BV 2.1 1.8 1.5 1.2EV/EBIDTA 15.0 10.9 9.5 5.2

EV/Sales 3.2 2.5 2.1 1.2Earnings Ratios

OPM 14.2% 15.3% 16.2% 17.9%NPM 8.6% 10.1% 11.2% 12.1%ROCE 7.0% 8.8% 14.6% 20.4%ROE 10.6% 16.0% 23.9% 26.3%Balance SheetRatios

Current Ratio 2.8 2.0 2.2 2.3Debt/Equity 1.5 1.8 1.4 0.9Debtor days 46.9 43.2 40.0 46.2Creditors Days 74.4 73.7 66.6 70.8Inventory Days 98.4 77.4 77.6 85.4FA Turnover 0.9 1.4 1.2 1.7

Financials (` mn)





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