Please refer to important disclosures at the end of this report
1
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
f
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
f
`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
f
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
R
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
y
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
r
prices would lead to delay in profitability.
At the end of 6MFY2011, SPL had net worth of `40cr, while it plans to raise `60c
r
through 50% dilution, which would value the company at `120cr, i.e., P/B o
f
1.2x. Even at the lower price band of `27, SPL would trade at a P/B multiple o
f
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
IPO.
A
VOID
Issue open: April 27, 2011
Issue close: April 29, 2011
Issue details
Face value:
`
10
Present eq. paid-up capital:
`
22.4cr
Offer Size: 2.1cr-2.2cr Shares*
Post eq. paid up capital*:
`
44.6cr-43.1cr
Issue size (amount):
`
60cr
Price band:
`
27-29
Promoters holding pre-issue: 100%
Promoters holding post-issue: 52-50%
Note:*At lower and upper price bands, respectively
Book building
QIBs At least 50%
Non-Institutional At least 15%
Retail At least 35%
Post issue shareholding pattern
Promoters Group 50.23%
MF/Banks/Indian
FIs/FIIs/Public & Others 49.77%
Sageraj Bariya
022-39357800 Extn: 6815
Servalakshmi Paper
Paper Dreams
IPO Note
|
Pape
r
April 27, 2011
Servalakshmi Paper
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IPO Note
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pril 27, 2011
2
Company background
SPL is part of the Servall Group. Servall Group has a strong goodwill in the paper
industry due to its long presence in the industry, spanning over four decades.
The group is present across all industry verticals such as machinery manufacturing,
paper manufacturing, project consultancy and turnkey project implementations.
Servall Group manufactures a wide spectrum of papers such as printing and
writing paper, newsprints, industrial paper and specialty papers. The group is
proficient in handling turnkey projects, design, consultancy, erection and
commissioning of paper machinery, machine rebuilding, unit equipment and
spares. The group has built and supplied 35 paper machines of various capacities
of up to 300 tonnes per day to paper mills in India. Servall Group has a client
base of more than 300 paper mills in Asia, Europe, Africa and Gulf Countries.
SPL was incorporated in November 2005. The company manufactures printing
and writing paper and newsprint. The company’s plant is situated in Tamil Nadu
and has total installed capacity of 90,000mn tonnes per annum, which makes it
one of the largest single-location plants in India. The plant also ranks among the
top 15 plants in the country. SPL’s plant has a co-generation power plant with a
capacity of 15MW for uninterrupted power and steam supply for the paper plant.
Issue details
SPL is tapping the IPO market with an issue size of `60cr in the price band of
`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. The company plans to use the IPO proceeds
for investment in capital equipment, meet working capital requirements,
repayment of loans and funding the subsidiaries for prepayment/repayment of
their loans.
Exhibit 1: Objects of the issue
Particulars Amount (` cr)
Purchase of equipment for value-added products 25
Long-term working capital requirement 30
Preliminary and pre-operative expenses including expenses for the IPO 5
Total cost of Phase-II 60
Source: Company, Angel Research
Exhibit 2: Shareholding Pattern
Pre-issue Post issue
Shareholding pattern No of shares
% No. of shares
%
Promoter and promoter group
22,424,000
100 22,424,000
50
Public -
- 22,222,222
50
Total 22,424,000
100 44,646,222
100
Source: Company, Angel Research
SPL has embarked upon setting up an integrated paper mill with a capacity of
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
Servalakshmi Paper
|
IPO Note
A
pril 27, 2011
3
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.
About the industry
The global paper industry is estimated to be worth USD$500bn. Global
consumption of paper and boards has grown from 169mn tonnes in 1981 to
253mn tonnes in 1993, 352mn tonnes in 2005 and 390mn tonnes currently.
The global paper industry is estimated to have been growing at a rate of 2.5–2.8%
per annum.
The paper industry is very capital-intensive and cyclical in nature. Currently, the
industry is highly dominated by North American and European producers.
It is estimated that North America consumes over 100mn tonnes of paper and
boards, while Asia consumes about 140mn tonnes of paper. Europe’s share
stands at 102mn tonnes. China is one of the fastest growing consumers of paper,
with growth of 9.3% in recent times, which is expected to slow down to 7.1% going
ahead. India currently consumes 8.5mn tonnes per annum of paper and is one of
the fastest growing markets, with a growth rate of 7.4% per annum.
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% CAGR
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.
Servalakshmi Paper
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IPO Note
A
pril 27, 2011
4
Key strengths
Strong expertise: Given Servall Group’s strong know-how in the paper industry due
to its long experience spanning across four decades, SPL has been able to set up
its plant at a lower cost compared to competitors. The project in totality would be
handled by promoter Group Company M/s. Servall Engineering Works (P) Ltd., an
expert in paper machinery design, engineering and manufacturing. As per
management and project consultant, total project cost as per industry norms was
estimated at ~`400cr, but, in actual, it came to `295cr, an approximate saving of
`100cr. SPL plans to further expand its capacity by 100,000 tonnes per annum.
Strong execution ability: The successful completion and implementation of Phase-1
of the project, without any hiccups or any over-run of cost, shows management’s
strong execution capability.
Logistical advantages: SPL’s paper mill is in close vicinity to Tuticorin Port (72km),
with the National Highway NH7 just 5km away. This enables faster transportation
of raw materials and finished products.
Risks and concerns
Promoter Group in a competing business: SPL’s promoters have group
concerns/entities that are also engaged in the manufacturing of paper.
Commodity nature of the business: The paper industry is highly commoditised
and lacks pricing power.
Servalakshmi Paper
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IPO Note
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5
Outlook and valuation
Low per capita consumption and low penetration of key products
India constitutes 16.5% of the world’s total population; however, it consumes only
1.53% of the world’s total paper production. Per capita paper consumption is
estimated to stand at 8kgs, as against global average of 50kgs (Japan – 250kg;
Korea – 165/kg; and China – 42kg). An increase of 1kg in consumption on a per
capita basis will increase demand by 1mn tonnes. Coated paper forms only 10%
of India’s total consumption under the writing and printing paper category,
as against 40–50% in developed countries.
Currently, SPL is making losses as the plant has recently started its operations.
As the plant stabilises and its operations and utilisation start ramping up,
profitability should follow. However, we are not bullish on the sector and the
company due to the following reasons:
1) Commodity nature of the business: This leads to lack of pricing power.
2) Growth by capex only: The business requires continuous capex for growth, due
to absence of pricing power; price-led growth is limited and short-lived.
3) Perennially low RoE business: We have analysed the paper sector and
companies across the sector. As per our understanding of the sector, the best
players in the sector have RoE of 14–16%.
4) Industry running below capacity: Total installed capacity is estimated to be at
9.18mn tonnes with production of 8.60mn tonnes, indicating that the industry
is running below capacity. Hence, capacity ramp-up for SPL would be difficult,
given such a scenario.
Given that the best players in the industry have RoE of 14–16%, with cost of equity
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 paper prices
would lead to delay in profitability.
At the end of 6MFY2011, SPL had net worth of `40cr, while it plans to raise `60cr
through 50% dilution, which would value the company at `120cr, i.e., P/B of 1.2x.
Even at the lower price band of `27, SPL would trade at a P/B multiple of 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 IPO.
Exhibit 3: Peer comparison
Company TTM P/B
BILT 1.5
TNPL 1.2
West Coast 1.1
J K 0.9
Average 1.2
Source: Company, Bloomberg
Servalakshmi Paper
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IPO Note
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pril 27, 2011
6
Profit & loss statement
Y/E March (` cr) FY07
FY08 FY09 FY10
6MFY11
Gross sales -
- - -
39
Less: Excise duty -
- - -
-
Net Sales -
- - -
39
Other operating income -
- - -
-
Total operating income -
- - -
39
% chg -
- - -
-
Total Expenditure -
0 0 0
37
Net Raw Materials -
- - -
15
Other Mfg costs -
- - -
18
Personnel -
- - -
3
Other -
0 0 0
1
EBITDA -
(0) (0) (0)
2
% chg -
- - -
-
(% of Net Sales) -
- - -
4.4
Depreciation& Amortisation -
0 0 0
4
EBIT -
(0) (0) (0)
(3)
% chg -
- - -
-
(% of Net Sales) -
- - -
(7.1)
Interest & other Charges -
- 0 0
13
Other Income -
0 0 0
1
(% of PBT) -
(221.1) (168.4) (22.5)
(4.1)
Recurring PBT -
(0) (0) (0)
(15)
% chg -
- - -
-
Extraordinary Expense/(Inc.) -
- - -
-
PBT (reported) -
(0) (0) (0)
(15)
Tax -
0 0 0
-
(% of PBT) -
(34.1) (25.8) (14.3)
-
PAT (reported) -
(0) (0) (0)
(15)
Add: Share of earnings of associate -
- - -
-
Less: Minority interest (MI) 0
0 - -
-
Prior period items -
- - -
-
PAT after MI (reported) (0)
(0) (0) (0)
(15)
ADJ. PAT (0)
(0) (0) (0)
(15)
% chg -
- - -
-
(% of Net Sales) -
- - -
-
Basic EPS (`) -
- - -
-
Fully Diluted EPS (`) -
- - -
-
% chg -
- - -
-
Servalakshmi Paper
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IPO Note
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pril 27, 2011
7
Balance sheet
Y/E March (` cr) FY07
FY08 FY09 FY10
6MFY11
SOURCES OF FUNDS
Equity Share Capital 2
4 8 21
22
Preference Capital 7
2 3 1
-
Reserves& Surplus 8
17 32 32
18
Shareholders’ Funds 17
23 42 54
40
Minority Interest -
- - -
-
Total Loans 0
18 124 231
262
Deferred Tax Liability -
- - -
-
Total Liabilities 17
41 166 284
302
APPLICATION OF FUNDS
Gross Block 2
3 3 4
265
Less: Acc. Depreciation -
0 0 0
5
Net Block 2
3 3 4
261
Capital Work-in-Progress -
24 129 216
-
Goodwill / Intangibles -
- - -
-
Investments -
- - -
-
Current Assets
Cash 5
7 7 3
2
Loans & Advances 10
7 24 19
22
Other 0
(0) - 21
53
Current liabilities 0
0 8 18
41
Net Current Assets 15
13 22 24
36
Others -
- - -
-
Total Assets 17
41 166 284
302
Servalakshmi Paper
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IPO Note
A
pril 27, 2011
8
Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com
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