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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.

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