Astron Paper and Board Mills IPO - Analysis

IPO Rating - 42 (Risky)*

About the Issue
 
Astron Paper & Board Mill Limited is coming up with an IPO of issue size of Rs 70 crore, consisting of 1.4 crore equity shares with face value of Rs 10 per share. The price band for this issue is Rs 45-50 per equity share. The minimum lot size is of 280 shares. The issue will remain open for subscription from December 15 to December 20, 2017. The company will get listed on both BSE and NSE. 

Purpose of the issue

The net proceeds of the issue will be utilized towards –

- Setting up an additional facility for manufacturing Kraft paper with lower GSM ranging from 80 to 180 GSM and lower B.F ranging from 12 B.F to 20 B.F.
- Part repayment of unsecured loan availed by the company
- Funding the working capital requirements of the company
- General corporate purposes

Company Background 

Astron Paper and Board Mill Limited is engaged in the manufacture of Kraft paper. It mainly caters to packaging industry and has a clientele consisting of various packaging companies and MNCs. It is one of the major kraft paper manufacturers in Gujarat with manufacturing facility having an installed capacity of 96,000 MTPA. This manufacturing facility is situated at Halvad, Gujarat, and is well-equipped with requisite plant and machinery and other facilities. It also has an in-house testing laboratory for quality control checks and testing of the products. 

The company has since its inception adopted the use of waste paper as raw material, instead of the traditional usage of wood. The process of manufacturing Kraft paper involves recycling of waste paper. Many organisations are focusing on using eco-friendly products leading to rising demand of FSC-certified Kraft paper. Kraft paper is used by packaging industry for manufacturing corrugated boxes and liners, corrugated sacks and composite containers. 

The company has an installed capacity of 96,000 MTPA, which it intends to expand up to 1,29,000 MTPA in FY19. The company aims at capacity utilisation of 83.7%, which will enable it to produce approximately 1,08,000 MTPA of Kraft paper by FY20. The company sources 90% of its main raw material, i.e. waste paper, through imports from the US, UK and central Europe. The price and exchange rate fluctuations are a risk for the company's business, but so far, the operating margins of the company have been better than its peers. 

Industry Outlook 

The Indian paper industry, with around 13 million tonnes of annual capacity, accounts for about 3% of global paper production. According to Indian Paper Mills Association, the domestic consumption of paper in India during 2014-15 was 13.9 mn tonnes, a growth of 6% YoY. The per capita consumption of paper in India stands at ~11 kg, which is relatively lower as compared to other developed and developing countries. With increasing focus by government on education and general uptick in macro economy, CARE Rating expects Indian paper industry to witness a CAGR of 7% over the next five years to about 20 mn tones. The growth will be largely driven by printing and writing and packaging and paper board segment. 

The Kraft paper is easily distinguished from the writing, printing or newsprint paper by its brown colour. Kraft paper finds its application in numerous products and usages. It serves as the most suitable raw material for manufacturing corrugated boxes. Apart from this, Kraft paper is used as packing and fold insertion material in textile industry, ordinary boxes (paper, card board, mill board boxes, etc.) manufacturing, books/note books/register binding, envelope manufacturing, etc. 

The increasing demand for packaging, changing lifestyle patterns in India, growth in population, growing awareness and need of education, sustainability and down gauging are some of the key demand drivers for the paper and paper products industry.  

Financial Performance 

From FY14 to FY17, the company’s revenue has shown growth from Rs. 106.19 cr to Rs. 184.58 cr,, representing a CAGR of 14.82%. Its EBITDA has shown growth from Rs. 11.33 cr to Rs. 23.01 cr, representing a CAGR of 17.95%. The company has seen a turnaround in its PAT, from a loss of Rs.3.02 cr to a profit of Rs. 9.59 cr. Its revenue, EBITDA and PAT for the six months ended September 2017 was Rs 110.96 cr, Rs 14.62 cr and Rs 9.45 cr, respectively, with an EBITDA margin of 13.18% and PAT margin of 8.52%.   

Valuation and Peer comparison

At the upper price band of Rs 50 with an EPS of Rs 3.06, the company’s P/E works out at 16.3x, while industry’s average P/E ratio is 22.89x. For FY17, the company delivered RoNW of 21.9%.  The company can be compared with some listed peers like Shree Ajit Pulp and Paper Ltd., Genus Paper & Boards Ltd. and South India Paper Mills Ltd. whose P/Es stand at 16.18x, 44x and 14.49x, respectively (CMP for calculating P/E is of Dec. 8, 2017). As compared to these peers, we can say that the company is fairly priced. 

Our View 

Kraft paper is mainly used as a raw material for corrugated boxes. Demand for corrugated boxes for packaging is increasing steadily and the company is planning to start manufacturing of these boxes. It is also planning to explore export markets and expand in the domestic markets. However, we see that growth rate for these products is at slower pace and company’s business is less diversified. The recent hike in the prices of Kraft paper posed threat to the corrugated box manufacturers. Also, the company’s issue size is small so getting allotment might not be easy. We find the investment risky so investors can avoid this IPO. 

*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment

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