Report Date 27th August 2010

Company Name West Coast Paper Mills Ltd.

Price / Recommendation (Rs.) ` 94 Buy

Company background:
WCPL has announced Q1 results:

` In Crore Q1FY10 Q1FY11 %y-o-y Q4FY10 %q-o-q FY09 FY10 FY11E

Net Sales 147 189 28.4% 169 11.6% 619 624 952
Other Income 1 2 104.9% 2 -32.2% 8 6 9
Total Income 148 190 28.8% 171 11.0% 628 630 961
Raw Material 53 63 18.9% 59 5.2% 231 222 382
Other
64 87 34.8% 82 5.4% 269 291 311
Expenses
Total
117 149 27.6% 142 5.3% 500 513 693
Expenses
PBDIT 31 41 33.5% 30 37.9% 128 117 268
Interest 2 10 357.0% 4 146.7% 8 12 46
Depreciation 5 20 311.2% 9 111.8% 20 24 81
PBT 24 11 -53.1% 16 -31.8% 100 81 141
Tax 3 -4 -220.4% 18 -121.9% 10 27 45
PAT 21 15 -27.2% -1 1391.4% 91 55 96
CP 25 35 36.9% 8 324.9% 110 78 177
Equity (FV 2) 13 13 13 0.0% 12 13 13
EPS(`)* 13.13 9.55 -0.74 14.99 8.72 15.24
CMP(`) 94 94 94 94 94 94
P/E(x) 9.8 6.27 10.78 6.17
Dividend% 100 100 150
PBDITM% 21.0% 21.8% 17.6% 20.7% 18.8% 28.1%
PATM% 14.0% 7.9% -0.7% 14.6% 8.8% 10.0%
* Annualised

 Bonanza Research Team |1 
 
  

Result Highlights:
• West Coast Paper mills Ltd (WCPL) has reported a decline in net profit by 27% y-o-y to `14.9cr in Q1FY11 on
account of higher interest and depreciation charges.
• Topline of WCPL increased by 28% y-o-y while its raw material expenses up by 19%.
• WCPL’s operating margins improved by 80bps in Q1FY11 while its PATM declined significantly on account of
higher financial charges and depreciation due to expansion.
• WCPL has a cash profit of `35cr a rise of 37% y-o-y

Investment Rationale:

Capacity expansion with improved technology as well as back ward integration would reduce
manufacturing expenses.

• WCPL has completed its three year long capacity expansion process in May2010 and now
became the fifth largest paper manufacturer in the country.
• WCPL has increased its production capacity by 78% to 320000MT from 180000MT. Installation of modern
pulping plant (part of its expansion process) WCPL has increased its pulping capacity from 300 tpd (tonnes
per day) to 725 tpd.
• New plant with latest technologies will reduce the shrinkage cost and power consumption which would soften
its manufacturing expenses.
• WCPL’s initiatives towards ‘Contract for Farming’ scheme will ensure continuous flow of
raw material and will also reduce raw material procurement distance significantly.
• WCPL has enhanced the thermal power generation capacity to 70MW which would make the company self
sufficient in power with 20MW exportable surplus

WCPL is also focusing on high margin copier segment, which is of international standard. That creates an
opportunities for overseas expansions for WCPL.

WCPL is in process of acquiring FSC certification: With the help of the backward farming initiatives WCPLhas
taken steps to achieve the prestigious Forest Stewardship Council (FSC) certification. This certification will further
promote growth and will be an added advantage to the Company’s branding efforts in the copier segment.
Paper prices are rising: Domestic paper prices are rising continuously in line with the international prices.
Earthquake in Chile which disrupted pulp supplies and withdrawal of subsidy by US govt ( $125‐150 per tonne) for
the treatment of black liquor generated during pulp manufacturing shoot up the international pulp prices leading to
rise in international paper prices.WCPL which manufacturing most of its pulp internally would be
benefited from this price rise.

Industry opportunities:
• Paper industry is expected to grow at 8% CAGR between FY10-14 on the back of healthy growth in industrial
production .Govt’s thrust on education and growing economy will also act as a catalyst for the industry growth.
• On account of its low cost base printing industry, India became a favorable destination for printing out
sourcing projects.

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• The paper consumption in India is set to increase as the per capital paper consumption is only 8kg as against
world average of 56kg.

Peer group comparisons:

Looking at the peers WCPL is relatively undervalued on Mkt.cap/capacity.

Rs in Cr in FY10 BILT WCPL TNPL

Gross Sales 1074 651 1056
PBDIT 264 117 312
Net Profit 125 55 126
Cash profit 202 78 242
PBDITM(%) 25 18 30
PATM (%) 12 8 12
Equity 131 13 69
Face Value (`) 2 2 10
EPS (`) 2 8 18
CMP (`) 34 94 140
PE( `) 15 12 8
Total Capacity(MT) FY09 480000 180000 245000
M. Cap 2258 591 968
M. Cap/capacity 47042 32833 39510
Total Debt 548 1235 1362
*post expansion capacity of WCPL will be 320000MT

Risk & concerns:

• Paper is a cyclical commodity, stock prices also react accordingly with high volatility.
International price movement also adds volatility to the domestic prices.
• There are environmental issues with the paper industry. Non-compliance with environment
protection policies could hamper production process.
• There is huge increment in debt, due to expansion. Higher Interest costs would affect the
bottom line
• Dumping of paper by China and other Asian countries where raw material costs are
subsidized would be a threat to the industry.

                                                                                                                                                    Bonanza Research Team |3 
  

Recommendation:

WCPL with an enhanced capacity is expected to increase its top line and operating profit significantly.
Modern technology and self sufficiency in power would reduce its operating expenses leading to a higher
margin in the coming years. Higher interest charges will reduce the bottom line to some extent. Valuation
looks attractive. At CMP `94 the stock is trading at forward earning multiple of 6.1x of FY11E.Investors
can buy at this counter for target of `105 in medium term.

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Corp off: Plot No. M-2, Cama Industrial Estate, Walbhat Road, Behind ‘The Hub’ Goregaon (E), Mumbai-400 063,
Tel: 022-67605 500/600. Regd. Off: 4353/4C, Madan Mohan Street, Ansari Road, Daryaganj, New Delhi-110 002,
Tel: 011-23242022 to 26

                                                                                                                                                    Bonanza Research Team |4