Skip to main content

Rama Pulp and Paper


Rama Pulp & Paper operates in the business of manufacturing paper (>80% of revenues) and trading chemicals.

The company manufactures various types of paper including carbon base paper where it has a 40% market share.  It does not appear to face major infrastructure issues of land, water, power etc.

The company has reported erratic profitability on moderately growing revenues – reporting operating profits of about 5cr on revenues of about 70cr in the last financial year.  The company operated with a moderate debt load.  It also reported net current assets of about 20cr as at 30th September, 2011.

Management plans to incur capital expenditure equivalent to the current total resources of the company to expand into the fertiliser business and manufacture phosphate fertilisers.  Such a step away from the company’s core competence is baffling.  

These large investments would require substantial additional financing that would surely require the raising of substantial additional debt and/or equity capital, which would raise the financial risk for minority shareholders.

Moreover, they intend to incur additional capital expenditure for purchasing paper machines and also for manufacture of chemicals (surfactants).

The company earns low returns on invested capital raising questions about industry profitability and/or management competence.  It also raises questions on the wisdom of additional capital expenditure as outlined above.

Apart from the above major factor casting doubt on the enterprise’s intrinsic value, the paper business is exposed to bouts of industry overcapacity with capacities added by other players in the previous year particularly in the same location.  Moreover, it is exposed to power grid tariff increases.

Management raised equity share capital in the last financial year thereby diluting minority shareholder interests.  This may be a sign of things to come (see capital expenditure plans above) over the next five years and minority shareholders ought to consider whether the substantial new investments would deliver commensurate returns.  The financial track record, management’s core competence, magnitude of prospective capital outlays, and other factors stated above seems to make this an uncertain and speculative assessment.

Comments

Post a Comment

Popular posts from this blog

On The Radar: India's Small-Cap Equities (Concluded)

We have been running a series of articles titled ‘Under The Radar: India’s Small-Cap Equities’ beginning in December 2011 - and followed up twice - with the last article in December 2013. We would like to conclude this series after updating the small-cap index level and returns, comparing it to our expectations ex-ante, and analysing the current scenario.  Following this, we have also outlined where we may take this blog in the future. The small-cap index closed at 11,087.07 on December 31 st , 2014.  This compares to a level of 6,150.65 in our last article – resulting in an advance of over 80% to date. This is a handsome absolute return by any standard, particularly compared to Indian government bonds, which yielded around 8-9% for the period.  This justifies the conclusion at the end of our previous article that “small-caps in India offer among the most attractive bargains during any time since 2006 and certainly in the entire Indian stock market today...
1 comment
Read more

Under the Radar: India’s Mid-Cap and Small-Cap Equities

Indian stock markets have been one of the worst performers in 2011 – worse than their BRIC peers, worse than the rest of Asia and far worse than the US with the leading indices declining about 25% during the year.  Foreign investors in India have also suffered substantial declines of nearly 20% in INR currency value. There appear to be several reasons for the market’s dislike for Indian equities in 2011, which include persistent inflation (including food inflation, which constitutes the major proportion of the typical Indian household), political paralysis (e.g. rollback of foreign investment in retail etc.) and global concerns about the solvency of several Eurozone countries. As a result, estimated GDP growth for the next financial year has been revised downwards from about 8% earlier in the year to about 6% now - with many market commentators wondering whether this rate of growth is India’s ‘new normal’.  This is still, however, substantially higher than global av...
2 comments
Read more

Under The Radar: India’s Small-Cap Equities (Part Three)

In February of this year, we summarised the valuation parameters of the BSE Small-cap Index in India (now the S&P BSE Small Cap Index) - following on from an earlier report we wrote in December, 2011 - and drew certain conclusions. We would like to update the valuation scenario with the data today, review those conclusions, and form new ones based on the available information. The small-cap index closed today (17 th December, 2013) at 6,150.65 with an indicated price to book value of 1.04. The closing value as on February, 2013 was 7,006.73 representing a decline of over 12% as of today. The current index value masks a greater fall of over 27% to a low of 5,085.56 in August, 2013. This represents an unsatisfactory overall performance for those who invested in small caps at the beginning of the year. In our earlier report, we made two assumptions towards the end of our report to form a conclusion as to prices then:          ...
Post a Comment
Read more