Seshasayee Papers

BAV Assignment 4 - Seshasayee Paper Relative Valuation

Group 2 Abhishek Anand Abhishek Bhandari Kartik Deuskar Ranjana Tewari

Contents 1 Firms Selection 2 Cost of Capital 3 Industry Comparables 4 Market Comparison 5 Recommendation

From Capitaline

Paper - Large AP Paper Ballarpur Inds. Bilt Industrial Emami Paper Hind.Newsprint Hind.Paper Corp JK Paper Mysore Paper Pudumjee Agro Pudumjee Pulp Rama Newsprint Ruby Macons Satia Paper Mill Seshasayee Paper Shreyans Inds. Sirpur Paper Star Paper Mills T N Newsprint West Coast Paper

Net profit Sales NP Price Margin 486.79 24.64 84 5.1% 2,162.33 250.75 135 11.6% Not 173.55 -88.69 NL* -51.1% 155.69 16.16 NL* 10.4% 304.7 15.68 NL* 5.1% 702.9 58.71 NL* 8.4% 756.41 45.91 40 6.1% 400.44 0.63 9 0.2% Not 78.85 1.18 38 1.5% 188.41 3 83 1.6% 351.47 24.53 25 7.0% 127.51 10.83 NL* 8.5% 106.19 0.23 NL* 0.2% 457.6 41.42 168 9.1% 198.25 6.62 39 3.3% Not 241.89 13.66 76 5.6% 210.85 6.16 32 2.9% Not 884.42 87.62 103 9.9% 555.21 66.42 94 12.0%

chosen because of the High

chosen as the net profit figu

chosen as the net profit figu

chosen as the net profit figu

NL-> Not lIsted

Chosen Firms AP Paper JK Paper Rama Newsprint Sirpur Paper T N Newsprint West Coast Paper

Firms AP Paper JK Paper Rama Newsprint Seshasayee Paper Sirpur Paper T N Newsprint West Coast Paper

Year End Sales NP 200703 486.79 200706 756.41 200703 351.47 200703 457.6 200703 241.89 200703 884.42 200703 555.21

Div% 24.64 45.91 24.53 41.42 13.66 87.62 66.42

10 6 0 35 35 40 150

B.V Rs 157.4 47.5 52.3 125.4 115.4 83.3 51.9

om Capitaline

ot chosen because of the High sales making it less comparable to Seshasayee

ot chosen as the net profit figure is very low as compared to Seshasayee

ot chosen as the net profit figure is very low as compared to Seshasayee

ot chosen as the net profit figure is very low as compared to Seshasayee

CPS Rs. EPS Rs. Price 25.5 9.4 12.3 5.9 9.9 4.2 49.4 36.2 15.5 8.5 21.6 12 19 14.3

84 40 25 168 76 103 94

Price Date Mkt. Cap. P/C 1/11/2007 216.9 1/11/2007 311.82 1/11/2007 147.73 1/11/2007 189.39 1/11/2007 114.38 1/11/2007 715.29 1/11/2007 419.29

P/E 3.3 3.2 2.6 3.4 4.9 4.8 4.9

9 6.8 6 4.7 9 8.6 6.6

P/BV 0.53 0.84 0.48 1.34 0.66 1.24 1.81

Multiples chosen

P/E EV/EBITDA EV/Capacity

P/E

Fundamental Factors

Company AP Paper JK Paper Rama Newsprint Seshasayee Paper Sirpur Paper T N Newsprint West Coast Paper

EPS

Dividend P/E trailing Payout Growth 9.4 84 8.94 10.4% 5.7% 5.9 40 6.78 31.9% 7.5% 4.2 25 5.95 0% 8.1% 36.2 168 4.64 8.2% 31.0% 8.5 76 8.94 38.4% 3.5% 12 103 8.58 31.6% 10.9% 14.3 94 6.57 42.8% 23.1% Median 6.78 32% 8.1% Average 7.20 23% 12.8%

Reason for the use of the Multiple

Price

Simplicity of use, all the comparable firms had positive earnings,

Based on P/E multiple the firm is undervalued as compared to its competitors. This is because of the years along with the investments it has made to increase its capacity to ensure high growth is sustain

EV/EBITDA

Company AP Paper JK Paper Rama Newsprint Seshasayee Paper Sirpur Paper T N Newsprint West Coast Paper

Fundamental Fa Deprecition & Amortization EV EBITDA EV/EBITDA Tax Rate /EBITDA 718.27 76.3 9.41 10.60% 35% 818.26 140.43 5.83 4.70% 30.70% 392.52 92.01 4.27 11% 42.50% 361.07 69 5.23 8% 23.60% 344.47 30.83 11.17 11.60% 28% 1255.68 212.36 5.91 20.80% 39.30% 705.83 65.94 10.70 8.10% 25.70% Median 5.91 11% 31% Average 7.50 11% 32%

The multiple covers the aspect of depreciation in a much clearer way than the P/E multiple. Since we a accounting is taken care of. Also this multiple takes care of the differences in the leverage of firms.Sin addition, this multiple is particulary helpful because of the reasons stated above. Fudamental Factors impact

Tax rate Higher Depreciation Higher Cost of Capital Higher Expected Growth Higher Reinvestment (Capex) Higher

the the the the the

tax rate lower the multiple DA/EBITDA lower the multiple cost of capital lower the multiple expected growth higher the multiple reinvestm,ent lower the multiple

The EBITDA multiple is low both as median and average for Seshasayee paper. After looking at fundam rate low DA expense. However it has a higher cost of capital. On the whole the firm is comparable to W the other firms. Hence the group finds the stock as Undervalued in terms of EBITDA multiple

EV/Total Capacity

Company AP Paper JK Paper Rama Newsprint Seshasayee Paper T N Newsprint West Coast Paper

Fundamen & Amortization Capacity / tonnes' EV/Capacit Capacity(Rs./ EV 000 y (Rs. /Kg) Tax Rate kg) 718.27 154 46.6 10.60% 1.7 818.26 195 42.0 4.70% 2.2 392.52 132 29.7 11.00% 3.0 361.07 115 31.4 8.00% 1.4 1255.68 245 51.3 20.80% 3.4 705.83 164 43.0 8.10% 1.0 Mean 40.7 10.5% 2.1 Median 42.5 9.4% 2.0

The multiple was chosen as it covers two important aspects of related to a paper company. The funda per kg and the efficiency of the firm Fudamental Factors impact Tax rate Higher Depreciation Higher Cost of Capital Higher Expected Growth Higher Reinvestment (Capex) Higher EBIT/Capacity Higher

the the the the the the

tax rate lower the multiple DA/Capacity lower the multiple cost of capital lower the multiple expected growth higher the multiple reinvestment lower the multiple EBIT per capacity higher the multiple

The firm has a below average multiple. The tax rate, cost of capital and depreciation per kg is below t which means that the realisation and the efficiency of the firm is on par with that of the whole industr growth because of capacity addition in pulp as well as paper production the firm is trading below the v Hence the group finds the stock Undervalued on the basis of EV/Capacity multiple

undamental Factors Average Growth Last Cost of equity 5 years 12.01% 8.4% 13.03% 7.5% 11.63% 5.0% 12.58% 22.7% 12.20% 5.6% 11.50% 8.2% 11.54% 16.0% 12.0% 8.2% 12.1% 10.5%

217.2

had positive earnings, This is because of the high growth the firm has experienced in the last couple of high growth is sustained in the coming years.

Fundamental Factors

Reinvest Expected ment / Cost of Capital Growth EBITDA 8.33% 8.4% 1.57 10.88% 7.5% 0.23 10.34% 5.0% 0.06 Plans to increase the capacity from 132k tonnes to 300k tonn 9.31% 22.7% 0.68 8.48% 5.6% 1.69 9.29% 8.2% 0.42 9.37% 16.0% 0.47 517.79 274.01 243.07 9.3% 8.2% 0.47 9.4% 10.5% 0.73

P/E multiple. Since we are using the EBITDA the difference in the depreciation e leverage of firms.Since the paper industry is under going a period of capital e.

After looking at fundamental factors we find that the firm has high growth, low tax firm is comparable to West Coast paper in almost all aspects and is better off most of BITDA multiple

city Fundamental Factors

Expected Cost of Capital Growth 8.33% 8.40% 10.88% 7.50% 10.34% 5% 9.31% 22.70% 9.29% 8.20% 9.37% 16% 9.6% 11.3% 9.3% 8.3%

Reinvest EBIT/Capac ment ity Rs/kg (Rs./Kg) 7.8 2.89 1.7 4.72 0.4 3.07 4.1 3.73 3.7 5.46 1.9 3.02 3.2 3.82 2.8 3.40

er company. The fundamental factor EBIT/capacity covers the aspects of realisation

ation per kg is below the industry average. The firm has an average EBIT/capacity at of the whole industry. With a much higher growth in the past and high expected m is trading below the value which could be near or higher than the industry average. tiple

2k tonnes to 300k tonnes by FY08. However no addition of capex is seen in the balance sheet (forecasted capex

alance sheet (forecasted capex of Rs 400 crores). If this is taken into consideration then reinvestment can subst

n then reinvestment can substantialy rise

Market Sales NP Mkt. Cap. All Companies 2,934,641.09 240,331.14 6,522,388.56 Seshasayee Paper 457.6 41.42 189.39 Industry (Selected Firms) 3733.79 304.2 2114.8

P/E 27.14 4.57 6.95

Clearly in terms of market P/E and Industry P/E the firm seems to be undervalued.

Recommendation

Based on the relative valuation the Group recommends a buy for the stock and views definite upside w

and views definite upside with a the target price of 198-210

8%

RFR Returns of Index (1991 till date) Risk Premium

17% 9%

D/E book Beta of value firm

Beta AP Paper JK Paper Rama Newsprint Seshasayee Paper Sirpur Paper T N Newsprint West Coast Paper Average

0.25 0.38 0.42 0.51 0.51 0.5 0.58

1.13 1.8 0.88 1.5 1.25 0.79 0.82

0.452

1.167

Tax rate unlevered beta

Interest Coverage Ratio Rating > 12.5 AAA 9.5 – 12.5 AA 7.5 – 9.5 A+ 6 – 7.5 A 4.5 - 6 A3.5 – 4.5 BBB 3 – 3.5 BB 2.5 - 3 B+ 2 – 2.5 B 1.5 - 2 B1.25 –1.5 CCC 0.8 – 1.25 CC 0.5 – 0.8 C < 0.5 D

34% 0.26

0.446 0.559 0.403 0.508 0.466 0.389 0.394

Cost of Equity Market Cap 12.01% 13.03% 11.63% 12.58% 12.20% 11.50% 11.54%

216.9 311.82 147.73 189.39 114.38 715.29 419.29

1.13

Spread 0.75% 1.00% 1.50% 1.80% 2.00% 2.25% 3.50% 4.75% 6.50% 8.00% 10.00% 11.50% 12.70% 14.00%

Based on Ashwath Damodran Low market Cap firms

D/(D + E) Cost of Debt EV Cost of Debt Market Capital Value 511.09 718.27 10.25% 0.70 8.33% 513.19 818.26 14.50% 0.62 10.88% 245.58 392.52 14.50% 0.62 10.34% 243.78 361.07 10.25% 0.56 9.31% 247.19 344.47 10.25% 0.68 8.48% 559.39 1255.68 9.80% 0.44 9.29% 293.54 705.83 9.50% 0.41 9.37% BACK

304.27

279.75

245.58

267.16

292.01 256.37

0.88