Stock Review: Paper Products

 

Paper Products' strong fundamentals, growth-oriented business and high dividend yield make it an attractive stock

 

MUMBAI-BASED Paper Products is the country's leading consumer packaging company. Strong fundamentals, growth-oriented business and high dividend yield make it an attractive stock.

BUSINESS:

At annual revenues of 700 crore, Paper Products is a leading player in the Indian packaging industry. It offers total packaging solution to the consumer industry with technologies such as flexible packaging, labelling and specialised cartons.

   It meets the packaging needs of various consumer product categories like personal products, personal wash, laundry, foods, sauces, beverages, bakery products, spices, confectionery, dairy and other product segments like seeds, specialised chemicals, electronics, healthcare as well as anti-spurious packaging. Its large clientele includes companies like Britannia, Cadbury, Castrol, Coca-Cola, Dabur, Emami, Eveready, GSK, Godrej, Hindustan Unilever, ITC, Marico, Nestle, Pepsi, Perfetti, P&G, Tata Tea, TTK-LIG and Wipro.

   Since 1999, Paper Products has a joint venture with the global packaging major, Huhtamaki Oyj that owns nearly 60% of its equity. Finland-based Huhtamaki Group is one of the world's top 10 consumer packaging multinationals.

GROWTH OPPORTUNITIES:

Being a packaging company, the growth of the company is dependent on the growth of the consumer goods industry. Economic growth and rising personal disposable income are growth drivers for the consumer goods sector, auguring well for the future of the packaging industry as well.

   Besides, the external growth drivers, Paper Products is also looking at forging growth through expansion of its capacities and increasing productivity.

FINANCIALS:

The company follows the calendar year as its financial year and has a history of steadily growing revenues. Its net sales have grown at a compound annual growth rate of 8.5% in the past five years. Like-wise, net profit has grown at a CAGR of 4.7% during the same period — lower than the growth of 5.13% in dividends during the same period.

   Its annual revenues dropped for the first time in 2009 due to the economic slowdown but they have recovered smartly in 2010 following the rebound in the economy. Raw material cost constitutes close to 70% of its revenues. Hence, any major movement in this component directly impacts the company's bottomline. During 2009, when raw material prices were benign, operating profit posted an extra-ordinary rise of 33%. In 2010, the company's operating profit dropped by 3% year on year due to high inflation in commodity prices. Input cost inflation in a short term thus remains a concern for the company's bottomline.

   Irrespective of any earnings fluctuations, the company has been paying dividends consistently since the past 60 years. With negligible debt on its books, it follows the policy of being conservative and consistent in its dividend payment and maintains a pay out ratio of 35-40% of its net profit.

VALUATIONS:

Trading at a market cap of 333 crore, the company is valued on the bourses at half of its annual sales. The company's stock is trading at over 13 times its trailing 12 months earnings. These are fair valuations for a cash rich, dividend paying and steady business in a defensive sector like consumer goods packaging with scope for appreciation. The company's stock has very little volatility given the fact that it hit a high of 71.5 and a low of 50 in the past 52 weeks. Investors interested in reaping steady returns from a stable business can consider this stock.