Andhra Pradesh Paper Mills Ltd:-Future growth prospects and outlook

Scripscan:Andhra Pradesh Paper Mills Ltd
cmp:66
Code:502330

Story:Hyderabad-based Andhra Pradesh Paper Mills Limited (APPM) is a part of the Kolkata-based LN Bangur group. Few institutional investors buy the so-called commodity stocks like paper because they think competition in the segment is too intense. It’s a false belief. Paper companies are doing very well. And they are cheap. APPM is currently trading at Rs66, at which price its market-cap is just 0.2 times its five-quarter sales (annualised) and 1.7 times its annualised operating profits. While turnover has come down over the past four quarters, operating profit at Rs44.03 crore for the March 2009 quarter was the highest over the past four quarters. Over the past five quarters, its sales have grown an average 12% and its operating profits have rocketed an average 63% over the same period. Its operating margin averaged a healthy 18% over the past five quarters. If paper is seen as a low-margin business, it is not correct. The business is capital-intensive. The return on equity (RoE) of APPM is 5%. But this is relevant only if you want to bet on the stock for the very long term. Even then, high RoE does not lead to higher stock prices. A good example is Hindustan Unilever. What is relevant is whether the stock is cheap relative to its growth potential. APPM is. APPM was set up in 1964; in 2001, it took over the control of Rajahmundry-based Coastal Papers Limited. The production of both the units put together is 181,000 tonnes per annum (TPA). The diversity and the range of its products meets the need of Modi Xerox, Indo National and leading publication houses like Macmillan and Navneet Publications. In October 2008, when the world was plunged in depression, the company had chalked out an expansion project of Rs291 crore to add 70,000tpa capacity. This is expected to be completed by March 2010. Of the Rs291 crore capital outlay, around Rs50 crore would go in for cold-fired boiler that would generate nearly 15MW of power, of which 5MW would be sold to Reliance Power. The company has obtained a loan of $40 million for the expansion from the International Finance Corporation (IFCW), which will also hold around 9% equity. Paper consumption is directly proportional to economic growth. At a demand growth of 8% pa, India is one of the fastest growing markets for paper, globally.A great paper stock to buy at dips.
Source:ML