Tamil Nadu Newsprint and Papers Ltd (TNPL) is the largest bagasse (a sugar Byproduct) based paper unit in India with the production capacity of 245,000 tonnes. The company is in the business of manufacturing and marketing of newsprint and printing & writing papers.

• Mill Expansion plan to raise production capacity from 245,000 tons to 400,000 to be completed before the first half of FY11E
• Highest production and sale of 254903 MT of paper. Both were higher by 9432 MT over the previous year.
• Zero Stock” of finished goods at the end of the financial year for the 18th time.
• With complete Implementation of the Mill Development plan in all respects, the company has moved from conventional bleaching to Elemental Chlorine Free (ECF) Bleaching making it environment compliant, operationally efficient and cost effective.

At the current price of Rs 94, the stock is available at 5.52x of its FY10E earnings & 2.23x of its FY11E earnings. We recommend BUY with a price target of Rs 115, given that the company’s future shows potential.

Tamil Nadu Newsprint and Papers Ltd (TNPL) bagasse (a sugar By-product) based paper unit in India production capacity of 245,000 tonnes p. a. functioning in two divisions , namely, Paper & Energy.

The company is in the business of manufacturing and marketing of newsprint and printing & writing papers. The products are being marketed throughout the country and also being exported to 30 countries around the world. Its manufacturing facility is located at Kagithapuram in Karur District of Tamil Nadu.

TNPL has the highest Operating Profit Margin within the Industry reflecting that company is operationally efficient and cost effective. Whenever the prices of Paper rises, price of wood pulp also rises which gets reflected in the operating profit margin (OPM) of companies in the industry. However for TNPL the cost of bagasse is mostly fixed and the entire rise in paper prices will get reflected in the profit margin.

TNPL is the only player among its peers using bagasse, sugar By-Product, as a major raw material while rest of the players majorly produce paper by only using hardwood/bamboo/wood pulp. TNPL overtakes it peers for maintaining Zero inventory at the end of each year.

SECTOR:- ü India is the fastest growing market for paper globally. From the last few years, the Indian Paper Industry has grown at an average rate of 6-7% whereas the paper market in developed countries has been stagnant at
2%. During the period 2002-07, newsprint, writing & printing, containerboard, carton board and others registered growth of 13%, 5%, 11%, 9% and 1% respectively.

The Indian Paper Industry accounts for about 1.6% of the world’s production of paper and paperboard. The estimated turnover of the industry is Rs 25,000 crore (USD 5.95 billion) approximately. The industry provides employment to more than 1.2 lakh people directly and 3.4 lakh people indirectly. The industry was delicensed effective from July, 1997 by the Government of India.

For manufacturing of paper, 35% of chemical pulp, 44% of recycled fibre and 21% of agro-residues are used.

As per industry estimates, paper production is likely to grow at a CAGR of 8.4% while paper consumption is expected to grow at a CAGR of 9% till 2012-13. The import of pulp & paper products is likely to show a growing trend.

Foreign funds interest in the Indian paper sector is also growing. IFC, the investment arm of World Bank is already associated with at least three of the IPMA member mills.

Demand for paper products like tissue paper, tea bags, filter paper, light weight online coated paper and medical grade coated paper, etc. is growing. These developments are expected to give fillip to the industry. Current consumption of Paper is at 8.50 million tonnes a year. The Paper industry is expected to grow to10 million tonnes by 2010 and to 15 million tonnes by 2015. Factors favoring growth are increased spending on education, higher literacy levels, improved standards of living, a booming retail sector etc.

The future growth is dependent upon imported market pulp due to serious shortage of wood in the country. Strengthening of Indian rupee is favoring the paper manufacturers as they can import the raw material at lower prices.

COMPANY:

Company is undergoing Mill Expansion Plan to the tune of Rs 1000 cr so as to enhance the present production capacity from
245000 tpa to 400000 tpa. Mill Expansion Plan involves installation of paper machine with the production capacity of 155,000 tpa Of fine paper & multi-fuel boiler with steam generation capacity of 125 tph and Backward integration Chemical bagasse pulp line.

Company has increased its Wind farm capacity from 15 MW in 1993-94 to 35.5 MW in 2008-09 which is exported to the state grid. It has generated Rs 63.44 lakh during FY09 through generation of 526.60 lakh units of wind power. Two phases of wind farm with a total capacity of 6.75 MW were registered with UNFCCC. The project has generated 55905 CERs up to 30.6.08.

Company is planning to install De-Inking Plant of a capacity of 300 tpd post–implementation of Mill Expansion Plan

TNPL is in the process of installing a 400 tpd cement plant worth Rs 45 crore for converting the mill generated lime sludge and fly ash generated into high grade cement. This conversion will reduce environmental hazards caused by lime sludge & Fly ash.

The company for the second time received the prestigious “IPMA Paper Mill of the year award for the year 2007-08”.

FUNDAMENTALS:

For past four years in a row, TNPL has proved its efficiency and competence within the industry with Return on equity and Return on capital employed sustaining around 15%. We believe that company will generate better returns for its stakeholders.

TNPL has reported sales growth of 12% CAGR while net profits have grown by 30% CAGR since 2005. Exports remained around
13% of the total turnover.

For the next three years to come, company has a commitment of Rs 876 cr towards capex, loan repayment and other growth plans.

The dividend yield has reached 8% in FY09 grown from over 4% since 2000. We expect further surge in dividend yield for FY11E & FY12E.

The Bio-methanation Plant generated 46.89 lakh cubic meters of methane gas in FY09 it enabled the company to reduce consumption of 2790 KL of furnace oil in the lime kilns saving Rs 30.39 cr. As a result of substitution effect company is enjoying cost advantage.