Please refer to important disclosures at the end of this report
Servalakshmi Paper (SPL), part of the Servall Group, was incorporated in
November 2005. SPL manufactures printing and writing paper and newsprint.
The company’s plant is situated in Tamil Nadu and has total installed capacity o
90,000mn tonnes per annum, which makes it one of the largest single-location
plants in India.
SPL is tapping the IPO market with an issue size of `60cr in the price band o
`27–29/share, thus resulting in a public issue of 2.2cr and 2.1cr equity shares at
the upper and lower price bands, respectively, of face value `10, resulting in a
dilution of 49.7% and 47.9% stake.
SPL has embarked upon setting up an integrated paper mill with a capacity o
90,000mn tonnes per annum along with a 15MW captive power plant at a single
location. The total investment is estimated to be `340cr and the entire project is to
be completed in two phases. Phase-1 of the project has already been completed
and the company’s plant has commenced commercial operations from April
2010. Money raised through the IPO would be used for Phase-II, under which SPL
plans to add balancing equipment for improving productivity and manufacturing
value-added products. Funds would also be utilised for working capital needs.
The Indian paper industry is highly fragmented with nearly 700 manufacturing
units spread across the country, with capacity ranging from 5 tonnes per day to
over 1,000 tonnes per day. Total installed capacity is estimated to be at 9.18mn
tonnes, with production of 8.60mn tonnes. The industry has grown at a 6% CAG
over the last few years and is estimated to grow at a 7.6% CAGR over the next
2–3 years, showing strong correlation with India’s GDP growth. Nearly 600,000
tonnes of new capacity is estimated to have been added in 2008 and 2009.
Industry estimates 500,000 tonnes of capacity addition over the next few years.
Outlook and valuations
Given that the best players in the industry have RoE of 14–16%, with cost of equit
for the top Sensex companies in a similar range, we believe investors should
approach investment in such a sector cautiously. SPL’s plant has started its
operations recently, thus the company will take some time to make profits.
Further, given the nature of the industry, any sort of price correction in pape
prices would lead to delay in profitability.
At the end of 6MFY2011, SPL had net worth of `40cr, while it plans to raise `60c
through 50% dilution, which would value the company at `120cr, i.e., P/B o
1.2x. Even at the lower price band of `27, SPL would trade at a P/B multiple o
1.20x (1.24x at upper band), while its peers, which are profit-making and have
longer history of operations, are currently trading at an average P/B of 1.2x
thus placing the stock relatively expensive. Hence, we recommend Avoid on the
Issue open: April 27, 2011
Issue close: April 29, 2011
Present eq. paid-up capital:
Offer Size: 2.1cr-2.2cr Shares*
Post eq. paid up capital*:
Issue size (amount):
Promoters holding pre-issue: 100%
Promoters holding post-issue: 52-50%
Note:*At lower and upper price bands, respectively
QIBs At least 50%
Non-Institutional At least 15%
Retail At least 35%
Post issue shareholding pattern
Promoters Group 50.23%
FIs/FIIs/Public & Others 49.77%
022-39357800 Extn: 6815
April 27, 2011