NR Agarwal Industries appears to be an undervalued paper company

NR Agarwal Industries appears to be an undervalued paper company with decent financials and strong growth prospects from capacity additions in higher margin writing paper. It could get re-rated in line with other paper firms following the AP Paper deal.

BUSINESS

NRAL is the largest producer of coated duplex board in the western region and is second only to ITC in India. Almost all leading FMCG and pharma companies are its clients. Unlike its peers, NRAL uses imported waste paper as raw material.

GROWTH DRIVERS

Nearly 80% of its 1,68,000-tonne per annum production capacity is for duplex boards and the rest for newsprint. By October 2011, it will add 1,09,500 tonne of capacity for new products printing and writing paper. It owns 100 acres land in Vapi valued at Rs 200 crore which can be used for future expansion.

FINANCIALS

While, NRAL's net sales in FY11 grew to Rs 467 crore at a CAGR of 14.5%, in last three years its net profit grew at a CAGR of 45.3%. Overall operating margin of 11.2% is likely to improve from October thanks to the 17-18% operating margins from writing and printing paper business.

Considering a 15% growth in current business thanks to added capacities, against 24% growth last year top line would rise to Rs 630 crore in FY12. Assuming a conservative net profit margin of 5.5%, the earning per share will increase 24% to Rs 20.4. Earnings growth will be faster in FY13 , the first full year of expanded capacity. Assuming realisation at the FY11 level of Rs 30,000 per tonne and capacity utilisation at 95%, FY13 sales would be around Rs 800 crore. At a slightly higher net margin of 6% the EPS would be Rs 26.6.

VALUATIONS

The scrip is currently trading at just two times its expected FY13 earnings. On a trailing 12-month basis, it is trading at a P/E of 3.4, which is lower than that of its peers like Rainbow Papers, JK Papers and West Coast.