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March 9, 2011

Rainbow Papers Ltd.


creating wealth from waste
CMP ` 54
Key Share Data
Face Value (`) Equity Capital (` mn) Market. Capitalization (` mn) 52-wk High / Low (`) Average Daily Volume BSE code NSE code Reuters code Bloomberg code 2.0 174.4 4622 65/24 116348 523523 RAINBOWPAP RNBP.BO RBWP IN

Target ` 91

Initiating Coverage - BUY

Shareholding Pattern

December 31, 2010


30%

Rainbow Papers Ltd (RPL) is the producer of 186 varieties of paper in India based in Gujarat. The company was focused at industrial paper till date, but after the installing of PM VIII machine, it will also get access to value added papers such as glazed news print and specialty papers. The current capacity of the company is 183,000 MTPA which will get increased to 305,000 MTPA after the above installation. The company not only caters to the domestic markets but also has registered its presence in international markets such as USA, Middle East, South Africa and UK.

Investment Rationale

Increasing capacity to meet growing demand The paper industry is expected to grow with the CAGR of 11% over next 3-4 years. 2% 61% RPL is undergoing capacity expansion plan to cater the growing demand, 7% with the estimated cost of ` 6.3 bn. The capex is divided in two phases. Promoters Institutions Phase I is already commissioned in FY10. Public Others Source: Capitaline Phase II with the estimated cost of ` 3.3 bn is expected to be Consolidated Financials (` mn) commissioned by April 2011. FY10 FY11E FY12E FY13E RPL will get access to value added papers after completion of Phase II. 2740.7 4076.1 6785.7 8887.8 Net Sales 18% 49% 66% 31% Sales Gr Topline to grow at a CAGR of whooping 48% during the next 2-3 years: 628.5 904.9 1553.9 2097.5 EBIDTA 235.9 409.9 761.0 1073.5 PAT Topline 2011-06-01 07:51:05 EDT. DownloadPDF. ISIEmergingMarketsPDF in-citibank from 192.193.160.10 onof RPL has grown with the CAGR of 23% in the past three years. -0.1% 73.8% 85.7% 41.1% PAT Gr It is further expected to grow by 48% in 2-3 years. The demand drivers 2.7 4.7 8.7 12.3 EPS (`) are5.5 7.9 13.2 18.2 CEPS (`) Government focus on education; Key Financial Ratios growing organized retail; FY10 FY11E FY12E FY13E 3.0 3.4 5.1 8.6 Int Cover (x) growing middle class changing lifestyle creating 20.0 11.5 6.2 4.4 P/E (x) demand for consumer durables, FMCG and other 2.1 1.8 1.5 1.2 P/BV (x) products. 20.3 14.0 8.0 6.1 P/Cash EPS 0.3 0.2 0.1 0.1 MCap/Sales Increasing margins with the focus on value added products: 15.0 10.9 9.5 5.2 EV/EBIDTA EBIDTA and PAT margin is expected to increase to around 24% and 12% 7.0% 8.8% 14.6% 20.4% ROCE 10.6% 16.0% 23.9% 26.3% ROE respectively with the company now focusing upon value added products. 22.9% 22.2% 22.9% 23.6% EBITDM(%) These value added paper enjoys higher realisations as compared to 8.6% 10.1% 11.2% 12.1% NPM (%) industrial papers. 1.5 1.8 1.4 0.9 Debt-Equity Currently it enjoys the margin of around 22% at EBIDTA levels and 11% at Performance comparison RPL v/s BSE Smallcap PAT level during 9MFY11.
140% 120% 100% 80% 60% 40% 20% 0% Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 -20% RPL BS E S M ALLCAP

Outlook & Recommendation The demand for paper is influenced by various macro-economic factors such as national economic growth, industrial production, promotional expenditure, population growth and the Governments allocation for the education sector. Domestic demand for paper is expected to grow at a CAGR of 11% in next 3-4 years. RPL would be among the few players in India manufacturing all kind of papers once the PM VIII is commissioned in April 2011. At the current market price of ` 54, the stock is undervalued based on discounted free cash flow approach. We recommend BUY rating on the stock with a target price of ` 91/- (68% upside) in 18 months. www.skpmoneywise.com Page 1 of 14

Source: Capitaline

Analyst: Vineet P. Agrawal


Tel No.: +91 22 2281 9012; Mobile: +91 9819510575 Email: vineet.agrawal@skpmoneywise.com

SKP Securities Ltd

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Rainbow Papers Ltd.

The Company: An Introduction


Rainbow Papers Ltd (RPL) was established in 1981 with its first venture of a creping and dying machine having production capacity of 6,000 MTPA. Today, it is one of the fastest growing company producing almost 186 different varieties of paper catering to diverse segment of the Indian as well as overseas usage markets. The paper manufactured by the company can be broadly categorized as below:
Category Varieties Paper Board Application Packaging Illustration For making cartons; Also used as filler in packaging Used in packaging of many everyday consumer products such as Pizza Boxes, toothpaste boxes, butter, notebook etc

Duplex Paper & Bristol Paper Industrial paper Coated Paper

Packaging

Packaging

Soap Rapper, Pharmaceuticals packaging and boxes etc

Crepe papers are meant for high quality packaging; Tissue crepe is used for Crepe Papers Packaging & Insulation decorative purposes; Electric Grade Crepe is used for insulation of Oil Filled Transformers and Cables Book covers, Leaflets, Magazines, brochures, Annual reports, hoardings, Coated Paper WPP ISIEmergingMarketsPDF in-citibank from 192.193.160.10 on 2011-06-01 07:51:05 EDT. invitation cards, greeting cards stickers, DownloadPDF. etc. Writing & Printing Paper (WPP) Computer stationary, textbook, writing Creamwove WPP books etc High quality premium note books Red Maplitho WPP Newsprint Normal Newsprint Coated Paper News papers Glazed news print* Used in thermal printers and particularly in cheap light weight devices such as adding machines, cash machines, credit card terminals etc Pay-in slips in banks Magazines

Thermal Paper Specialty Paper* Non-carbon Paper Light Weighted Coated

WPP

WPP WPP

Source: Company & SKP Research; *The Company will start producing glazed news print and specialty paper after commissioning of PM VIII news print machine in FY12

Infrastructure: The Company has its state-of the-art manufacturing facility at Village Rajpur, near Ahmedabad, Gujarat, with the total installed capacity of 1,83,000 MTPA. The company is in the process of further adding 1,22,000 MTPA of paper capacity which will provide the company the access to value added products like glazed news print and specialty paper. The company also has a coating division for manufacturing coated papers. The total installed capacity is 12,000 MTPA which will enhance to 36,000 MTPA post expansion in FY12. The plant is located near Mundra port ensuring steady raw material supply of waste paper with lower freight cost. It also provides easy access to international markets such as Middle East and Africa.

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Rainbow Papers Ltd.


RPL has installed captive power plant of 5 MW in 2004. The capacity was further increased to 10 MW in 2007. Today, it has the total capacity of 15 MW which fulfills all the present need of electricity of its plant. Geographic reach: 80% of RPLs total production is consumed in domestic markets and rest is exported. The Company is exporting its product to countries such as USA, Middle East, South Africa, South East Asia, Indonesia, France, Sri Lanka and United Kingdom. Strong dealer network: The Company has a strong dealer network with more than 60 dealers spread across Maharashtra, Gujarat and Central India. Esteemed clients: Reputed client base of RPL includes Nirma, Navneet Publications, Samrat News Paper, Hindustan Unilever, Colgate Palmolive and many more. RPL also caters to various state education boards and other Government bodies such as NCERT, IGNOU etc.

Raw Materials
Waste Paper: Wood fiber - the primary input: The primary input for the manufacturing of paper is wood fiber which is derived either from forest wood or agri residue or waste paper. Wood accounts for 37% of total production in India while agri residue and waste paper accounts for 32% and 31% respectively. Waste Paper the major input for RPL: RPL manufactures paper from waste paper. Almost 50% of the waste paper is imported either from Canada or Indonesia. Reasons for imports are: Indias per capita consumption of paper is lowest at 9 kg per person against global in-citibank from 192.193.160.10 on 2011-06-01 07:51:05 EDT. DownloadPDF. average 58 kg per person resulting in lower quantity of waste paper; Poor waste paper collection mechanism in India; Multiple usage of paper before recycling; and Imported waste paper offers better quality paper. Waste paper cost mainly includes collection centre cost and freight. Raw materials costs as a percentage of sales ranges between 48%-50% for the company. Fluctuating prices: Increase in waste paper prices between 2009 and 2010 is given below:
Prices in US $ (Per ton) Old News Paper Old Corrugated Cartons Mixed Waste Pulp
Source: The Hindu Business Line

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2009 175 170 130 480

2010 % Change 275 57.1% 320 88.2% 210 61.5% 610 27.1%

Waste Paper Composite index shows fall in prices from March:

Canadian Waste Paper Index 32000 31000 30000 29000 28000 27000 26000 25000 24000 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11

Source: http://www.trianglepaper.org

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Rainbow Papers Ltd.


Waste paper cost of the company fluctuates around ` 10-12 per kg mainly due to fluctuation of freight charges which basically is the derivative of crude price fluctuation. Increasing demand: The demand for waste paper is increasing year on year not only due to rise in the consumption of paper but also the policy change of various Governments regarding paper manufacturing. Demand for waste paper from China is increasing because now it is focusing on recycling of paper and shutting its wood pulp mills. China has added over 6 mn tones to its usual waste paper imports in 2010 as compared to about 26 mn tons annually. The US and European countries too are giving a policy push to recycle waste paper to address conservation issues. The demand for waste paper is also growing in the US. The US has suspended a tax credit subsidy to pulp mills for the use of black liquor as an alternative fuel. This subsidy runs into several billion dollars, given to the pulp till last year. It will mean that manufacturers will cut back on forest sources of wood fiber and increase the use of recycled paper. This will step up the demand for waste paper. India will have to step up its waste paper collection system as the US and Europe are stepping up waste paper usage and cutting down on virgin wood pulp use. Import duty cut in Budget 2012: Government has reduced import duty on waste papers from 5% to 2.5% in Budget 2012 to enhance the usage of waste paper in paper manufacturing.

Chemicals: Apart from 192.193.160.10 on 2011-06-01 are also EDT. DownloadPDF. ISIEmergingMarketsPDF in-citibankfrom the wood fiber, certain chemicals 07:51:05used for manufacturing
Process Coated Paper

paper. These chemicals are basically used to manufacture coated papers and deinking of waste papers. Chemicals are used as pigments, adhesives and chemical additives for manufacturing coated papers whereas they are used for pH control, bleaching etc in deinking of papers. Chemical cost as a percentage of sales ranges between 5%-10% for the company.

Some of the chemicals used in manufacturing papers are given below:


Chemicals China clay Calcium Carbonate Titanium dioxide Silica Styrene Butadine Starches Resins and PE Sodium silicate/hydroxide Hydrogen Peroxide Calcium Chloride Fatty Acid Used as Pigments Pigments Pigments Pigments Adhesives Adhesives Chemical Additives ----Purpose Ensures Glossyness Used as a Filler Provides whiteness and opacity provides shine and smoothness provides good aging stability Provides strength Provides water resistance and wer strength for pH Control for Bleaching for Calcium ion source as collector

Deinking

Source: SKP Research Desk

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Rainbow Papers Ltd.

Investment Rationale
1. Increasing Capacity to meet growing industry demand: The current Indian paper industry size is about ` 317 bn which is expected to grow with the CAGR of around 11% by FY2014-15 to ` 526 bn. The growth will be fuelled by strong industrial and economic growth. WPP is likely to be the largest contributor with the market share of 42% followed by paperboard at 39%. Demand for WPP segment is expected to rise with the CAGR of 7.6% till FY2014-15 as compared to CAGR of 6.5% during the last five years. Foreseeing the expected growth in the demand in the paper especially in WPP, RPL has planned to increase its paper capacity from 102,000 MTPA in FY09 to 305,000 MTPA in April 2011. The company has imported two paper plants of Voith make from Germany. The estimated cost of expansion is ` 6.3 bn. The cost includes: installation of German automated paper machine, installation of 20 MW thermal power plant, deinking plant, and technology upgradation. The project is divided in two phases details of which are given below:
Phase-I 81,000 MTPA Phase-II 122,000 MTPA

Expansion Capacity Enhancement

ISIEmergingMarketsPDF in-citibank from 192.193.160.10 on 2011-06-01 07:51:05 EDT. DownloadPDF. Installation PM - VII, Voith make paper machine PM - VIII, Voith make paper machine Deinking Plant Deinking Plant 20 MW captive power plant

Estimated Cost Commissioning


Source: Company

` 3.05 bn Already commissioned in Oct 2009

` 3.27 bn Expected in April 2011

RPL will get access to certain value added products like glazed news print and specialty papers with the completion of Phase - II. Both, Phase - I and Phase - II are funded through debt and internal accruals. Phase I has already been commissioned. The company has raised GDRs worth ` 1.23 bn and tied up with the consortium of eight banks for the loan of ` 2 bn and rest from internal accruals, for Phase - II.

2.

Topline to grow at a CAGR of whooping 48% during the next three years: RPLs topline has seen handsome CAGR growth of 23% for the past three years. Revenues posted by the company for FY10 was ` 27.4 bn, which we expect to touch ` 88.9 bn by the end of FY13 with the CAGR growth rate of 48% due to strong economical and industrial growth. The growth will be fuelled by: Government focus on education: India has the worlds second largest student population with an estimated student base of 232 mn in schools and 15.5 mn in colleges. As per BCG Group a global shortage of

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Rainbow Papers Ltd.


56 mn people in the working age group is expected by 2020 due to demographic shifts. On the contrary, India would have surplus of 47 million working population. Keeping this in view, Government, both at central and State levels and private sector are expected to increasingly invest in educational infrastructures in all stages including schools, higher education institutions and skills development center. During the 11th Five Year Plan the Government envisaged an outlay of ` 2700 bn towards the education sector, a four fold increase over the allocation of 10th Five Year Plan. Budget 2012 provisions: The Government provided ` 520.6 bn for education sector in the Budget 2012. Apart from this it has also proposed to introduce scholarship scheme to the students of SC/ST appearing in standard IX and X inducing them to study further. All these efforts from the Government are expected to boost the demand for WPP benefiting companies like RPL. Growing Organized Retail: The BMI India Retail Report for the first-quarter of 2011 forecasts that total retail sales will grow from US$ 392.63 billion in 2011 to US$ 674.37 billion by 2014. Strong underlying economic growth, population expansion, the increasing wealth of individuals and the rapid construction of organized retail infrastructure are key factors behind the forecast growth.
ISIEmergingMarketsPDF in-citibank from 192.193.160.10 on 2011-06-01 07:51:05 II and DownloadPDF. There will also be opportunities in India's tier EDT. III cities with

the expanding

middle and upper class consumer base. According to a report titled 'India Organized Retail Market 2010', published by Knight Frank India in May 2010 during 2010-12, around 55 mn sq ft of retail space will be ready in Mumbai, national capital region (NCR), Bengaluru, Kolkata, Chennai, Hyderabad and Pune. Besides, between 2010 and 2012, the organised retail real estate stock will grow from the existing 41mn sq ft to 95 mn sq ft. The increasing penetration of organized retail and the increasing preference for branded products are fuelling the demand for the products of the company. These organized retailers use virgin grade packaging boards which stimulate their demand. Increasing penetration of organized retail also creates demand for thermal paper as it is widely used by these retailers for billing. Increasing purchasing power of Indian middle class creating demand for consumer durables, FMCG, textiles and so on: Indias per capita income has increased by 10.5% to ` 44,345 in FY10 from ` 40,141 in FY09. This growth is the indicative of increased spending power of the consumer. The levels of aspirations have increased in the todays youth, with the rising trend of younger professionals that start earning early in life. According to a study by the McKinsey Global Institute (MGI), released in May 2007, India's middle class will swell by more than ten timesfrom 50 mn in 2007 to 583 mn people by 2025. By 2025, India will also become the 5th largest consumer market, moving up from the 12th position it occupied in 2007. SKP Securities Ltd www.skpmoneywise.com Page 6 of 14

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Rainbow Papers Ltd.


This increasing purchasing power gives rise to the demand for FMCG products and consumer durables. The Indian FMCG sector, with a market size of US$ 25 billion (200708 retail sales), constitutes 2.15% of India's gross domestic product (GDP). India is recognized as a cost-effective quality manufacturing base in the world market. Food products are the largest consumption category in India, accounting for nearly 21 per cent of the countrys GDP. The industry is poised to grow between 10 to 12% annually. Demand for FMCG products, consumer durables, textiles etc increases with the increasing purchasing power of the middle class which in turn creates the demand for packaging paper such as Kraft paper.

3.

Increasing margins with the focus on value added products: The revenues of the company are expected to be evenly divided among its industrial paper and other paper (WPP, News paper and value added paper) segment after the completion of Phase II expansion mentioned earlier. The company was largely focused upon paper boards for generating revenues prior to this expansion. The commissioning of PM VIII automated Voith make paper machine will provide the company the access to number of value added products such as glazed newsprint, light weighted coated paper, non-carbon paper, thermal paper, coated paper and crepe paper. Sales mix (volume wise) of the company at a glance:
Before P hase - II (FY10)

After P hase-II

6% ISIEmergingMarketsPDF in-citibank from 192.193.160.10 on 2011-06-01 07:51:05 EDT. DownloadPDF. 9%

29%
Paper Board 14% News Print WPP Value Added (Coated) Paper 71%

44%

Paper Board WPP News Paper V alue Added Paper 15% 12%

Source: Company & SKP Research Desk

These value added papers fetches high realisations vis--vis industrial packaging papers, thus enhancing margins of the company. Realisations at a glance:
Q1FY10 20 26 25 19 21 NA 38 44 Q2FY10 20 27 25 17 21 NA 38 45 Q3FY10 22 26 25 13 21 23 34 42 Q4FY10 22 27 27 15 22 23 33 44 Q1FY11 25 29 30 29 25 25 35 43 Q2FY11 26 30 31 20 26 25 35 43 Q3FY11 26 31 32 20 26 27 38 45

Paper Category Duplex Boards Duplex Board Grey Back Manila, Colour Kraft and Colour Board Duplex Board White Back Other Grade Average Duplex Board News Print WPP Coated Papers (Value Added)
Source: Company

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Average realisations per KG for the Q1FY11, Q2FY11 and Q3FY11 were ` 27.1, ` 26.9 and ` 29 respectively which we expect to reach gradually to ` 33 by FY13 with the improvement in product mix. We expect the EBIDTA margins and OPM to improve from 22.9% and 14.2% in FY10 to 23.6% and 17.3% in FY13. The graph below shows the journey of margins of RPL:
25.0% 20.6% 20.0% 15.0% 10.0% 5.0% 0.0% FY07 FY08 FY09 FY10 FY11E FY12E FY13E 16.1% 9.2% 13.6% 10.5% 14.2% 15.3% 16.2% 21.3% 22.9% 22.2% 22.9% 23.6% 17.9%

EBIDTA Margin (%)


Source: Company & SKP Research Desk

OPM (%)

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4.

Reducing Debt Favorable D/E: Since RPLs expansion plans will get over by the beginning of FY12 and there are no further plans for expansion (till date) we expect reduction in term loans in the books with the repayment. Term loans, which stood at ` 2,438 mn in FY10, is expected to reduce to ` 2,100 mn in FY13. We expect D/E to stabilize around 0.9x by the end of FY13 from 1.5x in FY10 with the improving shareholders fund and reducing term loans. Interest Cost & Interest Coverage
250 10

Debts and D/E


5000 4000 Debt (Rs mn) 3000 2000 1000 0 FY07 FY08 FY09 FY10 FY11E FY12E FY13E 4.0 3.5
Interest Cost (Rs mn)

200

8 Interest Coverage (x)

3.0 D/E (x) 2.5 2.0 1.5 1.0

150

100

50

0.5 0.0
0 FY07 FY08 FY09 FY10 FY11E FY12E FY13E 0

Source: Company & SKP Research

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Rainbow Papers Ltd.


5. Near zero wastage of raw material: RPL has adopted the policy of near zero wastage of raw material by usage of sludge, plastic waste and fly ash for manufacturing innovative products having applications in varied industries. Sludge is the semi-solid material leftover of the processed wastepaper. Following is the various innovative usage of sludge, plastic waste and fly ash:
Innovation Paper Board Plastic Sheets - plain and corrugatted Bricks Application Substitute of wood for manufacturing furniture Thached roof Packaging

Residue Material Sludge Plastic Waste Fly Ash


Source: Company

Source Obtained while manufacturing from recycled fiber Segregated during waste paper processing by-product of captive power plant

The plants for the above products were installed in December 2010. We expect the above product to contribute around ` 130 mn ` 140 mn every year to the revenues of the company. Such efforts made by the company add to the profitability of the company with marginal production cost and also eliminates the problem of waste disposal.

Key Concerns
1.

Inadequate availability of virgin fiber: Availability of virgin fiber is inadequate resulting in high cost of raw materials including wood, non-wood and waste paper.

ISIEmergingMarketsPDF in-citibank from 192.193.160.10 on 2011-06-01 07:51:05 EDT. DownloadPDF. RPLs performance may suffer due to no availability or inadequacy of waste paper.

2.

Price volatility of waste paper: As mentioned earlier, waste Paper is the key raw material for the company, 50% of which is to be imported due to lack of proper collection infrastructure and low per capita consumption in India.

This makes RPL exposed not only to freight rate fluctuation risk due to crude oil price fluctuation but also the currency risk. Any adverse movement in the prices may put negative impact on the margins of the company.

3.

Fragmented Industry high competition: The domestic paper industry is highly fragmented. The estimated number of mills in India varies between 500 to over 1,000 with small size of paper mills.

Mills with the capacity of around 7,500 MTPA is considered small mill and the mills with the capacity of over 33,000 MTPA is considered big mills in India. Nearly 45% of paper mill in India are small units which are largely present in lower end of paper product segments such as unbleached kraft paper, duplex board, creamwove paper and news print. Thus, this makes the competition relatively higher within these products.

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Rainbow Papers Ltd.


4. Substitution Threat: Paper competes with the products such as polymers and steel especially in industrial paper segment. Polymer poses the threat due to its being cheaper in comparison to paper. Its durability and appearance are also far better than paper. Similarly, WPP faces threat with increasing thrust for online storage of data.

Peer Set
As mentioned earlier, Indian paper industry is the highly fragmented industry with small size of paper mills. The top five paper producers account for 20-23% of market share, approximately. Given below are brief of some of the prominent organized players in the industry:
Paper Category Paper & Paper Board WPP & Paper Board WPP, Industrial Paper & Copier WPP, Newsprint Industrial Paper & Mechanical and chemical pulps WPP, Industrial & Speciality Papers EBIDTA/Ton ` 8,627 6,780 9,573 2,869 5,771 D/E (x) 1.2 2.1 1.4 1.5 1.5 P/E (x) 4.9 8.3 4.5 2.8 20.0* EV/EBIDTA (x) 4.9 12.6 3.7 3.5 15.0

Players (All FY10 figures) Andhra Pradesh Paper Mills West Coast Papers JK Paper N R Agarwal Industries RPL

Source: Capitaline and SKP Research Desk; * due to stock split of FV ` 10 each to ` 2 each during FY10

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Rainbow Papers Ltd.

Financial Outlook
10 9 8 Net Sales (Rs bn) 7 6 5 4 3 2 1 0 FY09 FY10 FY11E FY12E FY13E 2.3 2.7 4.1
CAGR: 48%

8.9

6.8

Top-line to grow at a CAGR of 48% in the coming 2-3 years: Net sales have gone up to ` 2.7 bn for FY10 by registering a growth of 18% due to improved realisations and higher volumes due to improved demand from the user industry. We expect the topline to grow at a CAGR of 48% in the coming 2-3 years, led by better realisations of value added papers and higher volumes due to commissioning of new capacities.

Source: Company & SKP Research Desk

Improving margins: RPL has witnessed EBITDA margin of 22.9% in FY10 due to improved realisations. We expect margin to improve to 23.6% during the next 2-3 years on account of higher realisations enjoyed by value added paper products.

2000 1800 1600 EBIDTA (Rs mn) 1400 1200 1000 800 600 400 200 0 21.3% FY09 FY10 FY11E FY12E FY13E 493 629 22.9% 1554 23.6%

24.0%

1200 1000
EBIDTA Margins (%)

12.1% 11.2% 1074

12.5% 12.0% 11.5% PAT Margin (%) 11.0% 10.5% 10.0% 9.5%

23.5%

PAT (Rs mn)

23.0% ISIEmergingMarketsPDF in-citibank from 192.193.160.10 on 2011-06-01 07:51:05 EDT. DownloadPDF. 800 905 22.9% 22.5%

10.2% 600

10.1% 410

761

22.2%

22.0%

400 236 236 200 8.6% 0 FY09 FY10 FY11E FY12E FY13E

21.5%

9.0% 8.5% 8.0%

21.0%

Source: Company & SKP Research Desk

PAT margin has declined to 8.6% in FY10 vis--vis 10.2% last year. We expect PAT margin to increase to 12.1% by FY13. EPS of the company is expected to grow from ` 2.7 in FY10 to ` 12.3 in FY13.

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Rainbow Papers Ltd.

Valuation
Demand for paper and paper products has renewed with the strong rebound of the India and global economy. Domestic demand for paper is expected to grow with the CAGR of 11% in next 3-4 years. RPL would be among the few players in India manufacturing all kind of papers once the PM VIII is commissioned in April 2011. At the current market price of ` 54, the stock is undervalued based on discounted free cash flow approach. We recommend BUY rating on the stock with a target price of ` 91/- (68% upside) in 18 months.
Assumed Terminal Year NOPLAT at Terminal Year (` mn) Cost of Equity (%) WACC (%) Discounted Terminal Value (` mn) Present Value of FCFF till Terminal Year (` mn) Enterprise Value to Firm (` mn) Less Debt (` mn) Add Cash (` mn) Present Value of Equity (` mn) No. of Equity Shares (mn) Fair Value (`)
Source: SKP Research Desk

FY20 1,472.1 19% 9.4% 6,599.9 3,438.2 10,038.0 3,357.7 1,215.3 7,895.6 87.2 90.5

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Financials
Income Statement
Particulars
Net sales Growth (%) Material Consumed Chemicals Consumed Personnel Expenses Other Expenditure EBIDTA EBIDTA Margin (%) Growth (%) Depreciation EBIT EBIT Margin (%) Growth (%) Interest Other Income EBT Tax PAT PAT Margin (%) Growth (%) EPS (Rs.)

(` mn)
Balance Sheet FY10
2740.7 18.2% 1164.2 150.4 77.8 576.9 628.5 22.9% 27.4% 240.3 388.2 14.2% 59.4% 129.0 52.1 311.4 75.5 235.9 8.6% -0.1% 2.7

FY11E
4076.1 48.7% 1976.9 224.2 114.1 856.0 904.9 22.2% 44.0% 282.6 622.3 15.3% 60.3% 180.8 40.8 482.2 72.3 409.9 10.1% 73.8% 4.7

FY12E
6785.7 66.5% 3257.2 359.6 190.0 1425.0 1553.9 22.9% 71.7% 453.6 1100.5 16.2% 76.9% 217.2 67.9 951.2 190.2 761.0 11.2% 85.7% 8.7

FY13E
8887.8 31% 4221.7 453.3 248.9 1866.4 2097.5 23.6% 35% 510.7 1586.8 17.9% 44.2% 184.8 88.9 1490.9 417.5 1073.5 12.1% 41.1% 12.3

Particulars
Equity Capital Reserves Net worth Long-term Loan Deferred Tax Liab. Total Liabilities Net Fixed Assets Capital WIP Investments Inventories Accounts receivable Cash & Bank Other Current Assets Loan & Advances Current Assets Account payables Other Current Liab Provisions Curr. liab. & prov. Net Current Assets Total Assets

FY10
174.4 2043.8 2218.2 3357.1 142.1 5718.1 3140.1 1120.3 0.2 336.6 394.4 1215.3 0.0 332.5 2278.8 661.8 0.0 160.0 821.8 1457.0 5718.1

FY11E
174.4 2383.0 2557.4 4520.6 142.1 7220.1 2857.5 3270.3 0.2 501.4 570.7 633.9 0.0 529.9 2235.8 984.2 0.0 159.6 1143.8 1092.1 7220.1

FY12E
174.4 3012.7 3187.2 4343.2 142.1 7672.4 5674.4 0.0 0.2 882.1 916.1 969.8 0.0 882.1 3650.2 1492.9 0.0 159.6 1652.4 1997.8 7672.4

FY13E
174.4 3901.0 4075.5 3695.4 142.1 7913.0 5163.7 0.0 0.2 1093.2 1333.2 1282.1 0.0 1155.4 4863.9 1955.3 0.0 159.6 2114.9 2749.0 7913.0

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Particulars

Cash Flow Statement FY10

FY11E

FY12E
951.2 670.6 -760 861.7 0.0 0.0 0.0 -525.8 335.9 633.9 969.8

FY13E
1490.9 695.5 -856.6 1330.0 0.0 0.0 0.0 -1017.7 312.3 969.8 1282.1

Key Ratios Particulars


Valuation Ratios P/E P/Cash EPS P/BV EV/EBIDTA EV/Sales Earnings Ratios OPM NPM ROCE ROE Balance Sheet Ratios Current Ratio Debt/Equity Debtor days Creditors Days Inventory Days FA Turnover

FY10

FY11E

FY12E
6.2 8.0 1.5 9.5 2.1 16.2% 11.2% 14.6% 23.9% 2.2 1.4 40.0 66.6 77.6 1.2

FY13E
4.4 6.1 1.2 5.2 1.2 17.9% 12.1% 20.4% 26.3% 2.3 0.9 46.2 70.8 85.4 1.7

Profit before Tax Add: Depreciation, Int. & Other Expenses Net changes in WC, tax interest Cash flow from operating activities Capital expenditure Investments, Sales of FA, Div. Recd & others Cash flow from investing activities Cash flow from financing activities Net Increase/Decrease in Cash & Cash Equivalents Opening Cash Balance Closing Cash Balance

311.4 359.9 -87.2 584.1 -1114.6 32.1 -1082.5 1585.3 1086.9 128.4 1215.3

482.2 463.4 -288.3 657.4 -2150.0 0.0 -2150.0 911.3 -581.3 1215.3 633.9

20.0 20.3 2.1 15.0 3.2 14.2% 8.6% 7.0% 10.6% 2.8 1.5 46.9 74.4 98.4 0.9

11.5 14.0 1.8 10.9 2.5 15.3% 10.1% 8.8% 16.0% 2.0 1.8 43.2 73.7 77.4 1.4

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