West Coast Paper Mills: Hold

Recommendation: Hold

Trading at around Rs. 82, the West Coast Paper Mills (WCPL) stock may be a good bet for an investors with an appetite for risk. The earnings performance for the quarter-ended June 2000 was fairly good. This apart, the fundamentals of the paper industry have been improving over the last 18 months.

Pulp and paper prices in the domestic and global markets have been showing a steady uptrend. Though at the domestic level, the increases have not been of the same order, the price levels are distinctly better than what they were a couple of years back. This is also the longest period for which prices have ruled firm since the mid-1990s, indicating that firm demand is behind this trend.

As for the bigger players, the improvement in the price levels may augur well for the bottomline of West Coast Paper. Given the size of the plant and its efficient operations, the company may be a potential candidate for consolidation in the industry. Against this backdrop, existing shareholders can stay invested though the upside potential may be capped by concerns about the business group. This factor has acted as a damper in the past and could well do so in the period ahead as well.

Financial performance: The company's earnings performance for the 2000-2001 first quarter was fairly good. Sales revenues rose 14 per cent to Rs. 80.62 crores compared to the corresponding previous period. Operating margins rose by seven percentage points to 17 per cent. Post-tax earnings nearly trebled to Rs. 6.33 crores. On the equity base of Rs. 8.94 crores, the annualised earnings per share of the company works out to Rs. 28.

Business profile: WCPL is the flagship company of the Calcutta-based S. K. Bangur group. The company's main line of business is writing/printing and packaging paper. It has also set up an optical fibre cable unit and plans to diversify into sugar production. For the year-ended March 1999, paper and related products contributed around 86 per cent of the turnover of the company.

Prospects: The company's prospects for the in the near-term look bright. The paper industry went through a lean period from the mid-1990s till early 1999. Over the last few months, paper prices have been hardening, leading to improved realisations for manufacturers. If the firm trend in prices sustains (this appears likely over the next six-nine months), the company's performance is likely to be good.

WCPL has one of the largest plants with a total capacity of around 1,15,000 tonnes. This high capacity helps the company compete with volumes. Further, it has also been concentrating on exports to some extent. The company exports to Singapore, Honk Kong and the UAE. The depreciation of the rupee may help the company get a higher realisation, which will improve margins this fiscal.

Given the state of the industry after the recent lean phase, which has had a negative impact on most players, there may be a phase of consolidation. This may help sustain valuation in the stock at around the current levels.