Astron Paper
IPO Snapshot:
Astron Paper has entered the primary market on Friday 15th December 2017 with a fresh issue of 1.4 crore equity shares of Rs. 10 each, in the price band of Rs.45 to Rs. 50 per share. Representing 30.11% of the post issue paid-up share capital, issue will raise Rs. 70 crore at the upper end and will close on Wednesday 20th December. Listing is expected on 29th December, in the T2T segment. Unlike other main board issues which have 50% of the issue reserved for institutional investors, the institutional book here is only 10%, while reservation for HNIs is a steep 55% (versus 15% generally). Retail quota remains same, at 35%.Thus, this coupled with small issue size may keep institutional holding in the stock low, post listing too.
Company Overview:
Astron Paper manufactures kraft paper in the 140-350 GSM and 22-35 BF range, at its sole facility in Gujarat, having an installed capacity of 96,000 MTPA. Company uses waste paper as its raw material, most of which is imported. Company sells kraft paper, used in the packaging industry, only in West and North India, in Gujarat, Rajasthan and Madhya Pradesh, together accounting for nearly 2/3rd of the revenues. Top 10 customers accounted for 60% of H1FY18 revenues.
Objects of Issue:
With current capacity utilization at 75% (still low as many paper makers operate at 95-100% capacity), it is undertaking IPO to fund expansion at its existing facility, proposing to augment capacity by 34% to 1,29,000 MTPA, with an investment of Rs. 23 crore, for manufacture of lower GSM kraft paper (80-180 GSM and 12-20 B.F.), to commence operations by Jan 2018. However this is likely to be delayed, given that order for 100% machinery is yet to be placed, as of RHP dated 5-12-17. Balance issue proceeds will partly repay unsecured loan of Rs 8 crore to a group company and fund working capital needs of Rs.24 crore.
Financials:
Company has been incorporated only in 2010, making it a ‘newbie’ / very young company. Its financial performance however has scaled up very well – from FY14 revenue of Rs. 106 crore, company clocked revenue of Rs.110 crore for H1FY18, while PBT of negative Rs. 1.40 crore in FY14 has grown to positive Rs.8.5 crore in FY17 and to Rs. 7 crore in H1FY18. FY17 revenue stood at Rs. 183 crore while EBITDA came in at Rs. 23 crore (EBITDA margin 12%), with PBT of Rs. 8.5 crore. PAT however is higher than PBT due to deferred tax credit taken in both FY17 and H1FY18. Hence, one must lay more emphasis on growth at the PBT level, than PAT level. Company falls under MAT and has been utilizing MAT credit till H1FY18, making it effectively a nil tax paying company currently.
H1FY18 financials have posted healthy growth, with revenue and EBITDA at Rs. 111 crore and Rs. 15 crore respectively, while PBT for the first half was at Rs. 7 crore. On PAT of Rs. 9.5 crore, H1FY18 EPS was at Rs. 2.91, as against FY17 EPS of Rs. 3.06, on an equity of Rs. 32.50 crore. Company’s RoNW is also healthy at 22% for FY17 and 18% for H1FY18 (not annualized).
While the business is working capital intensive, company’s working capital position has remained firm with debtor and inventory days at 75 and 65 days outstanding respectively, despite sharp growth in business volumes. As of 30-9-17, net worth was at Rs. 54 crore, translating into BVPS of Rs.17. Currently, 62.64% stake is held by the promoters, including listed ceramic maker Asian Granito’s 27%. Post IPO, combined promoter holding will fall to 44%, while Asian Granito will hold 19%. Balance stake is held by 18 private companies / individuals. Company’s total debt stands at Rs. 86 crore. Excluding cash and equivalents of Rs. 6 crore, current net debt to equity ratio of 1.5:1 is seen quite high. Post IPO, however, as net worth expands and Rs. 8 crore debt is repaid, net debt to equity ratio will contract to a more comfortable level of 0.6:1.
Valuation:
At Rs. 50, company’s market cap will be Rs. 233 crore and enterprise value Rs. 304 crore. This leads to PE multiple of 11x (FY18E), which is inline. EV/EBITDA multiple, based on FY18E and FY19E earning is at 10x and 8x respectively, which is slightly on the higher side, but given high historical growth rates, strong fundamentals and planned capacity expansion, it appears reasonable. Leading paper stocks such as JKPaper, West Coast, Seshasayee and Kuantum Paper with topline between Rs. 600-3,000 crore and net margins between 8-11%, are ruling at PE multiples of about 10x and EV/EBITDA multiples of 6-7x, based on FY18E.
Also, comparison with another Gujarat based peer NR Agarwal, using the same raw material source and similar geographical location, leads to a favourable outcome. NR Agarwal, with over 3 lakh MTPA capacity, across 5 plants, using waste paper as input, having 93% capacity utilization and guiding for 100% for F18, topline of Rs.1,400 crore and net margin of 5% for FY17, is ruling at a PE multiple of 10x and EV/EBITDA multiple of 7x, based on FY18E. NR Agarwal commands EV/tonne of Rs. 34,100 while Astron is available at Rs. 23,600 (post expansion), which is seen attractive.
Paper sector is in a cyclical upswing due to shutdown of capacities in China, as well as softening of some raw material prices, like waste paper, which will benefit the company. Also additional capacity from Q2FY19 will augment both topline and bottomline. While some peers are still ruling under debt and some reporting losses even in H1FY18 (such as TNPL and South India Paper), company has been able to strengthen its financial smartly.
Conclusion:
While small issue size and lack of credible track record of merchant banker on the main bourse will weigh adversely on the issue, sector tailwinds, high historical growth rates and undergoing capacity expansion will aid the financials. Given better fundamentals, one may apply in the issue, especially with a medium term view.
Disclosure: No interest.