If sectors such as FMCG are seen as safe havens for investors in volatile markets, then the companies or sectors catering to this sector would be considered safe bets too. Taking a cue from this, we have shortlisted Paper Products, a company that provides total packaging solutions to the FMCG industry, as our Choice Scrip recommendation in this issue. Apart from its consistent 20-year dividend track-record, a high dividend yield of 2.75 per cent (ex-dividend), low debt, capacity expansion and a strong client base make the scrip a grab at its CMP of Rs 80.60 (FV Rs 2).

Paper Products (PPL) is a consumer packaging company, which provides a wide range of packaging solutions such as custom designed films, foils and paper-based laminate structures for packaging solid, powder and liquid products in consumer pack sizes. PPL covers almost the entire range of FMCG products. PPL’s product portfolio includes flexible packaging and labelling, specialised cartons and a separate packaging machine division. Nearly 80-85 per cent of its Rs 704 crore revenues come from flexible packaging and labelling, while the balance 15-20 per cent comes from its cartons and packaging machine division.

PPL should do well because, disposable incomes are on a rise across India, which has led to a shift in consumption patterns. Besides, in a time when shopping preferences are veering towards mall culture, companies are spending on packaging to make their products stand out. This creates growth opportunities for companies like PPL. In fact, the best part is that most of the strong brands that are usually found on retail store shelves are all PPL’s clients. The management claims that it is one of the top four players in India, with a market share of around 10-12 per cent in the organised pie, amounting to about Rs 5600 crore. 

To drive future growth, PPL is expanding its flexible packaging capacity through a capex of about Rs 42 crore, funded through internal accruals. Of this, Rs 30 crore would be spent to set up a new printing and conversion line at Rudrapur, Rs 5-6 crore would go towards a printing line at Hyderabad, while the balance would be diverted towards rebalancing of its equipments. The expansion is expected to be completed by Q4 2011 (year ending December), taking its flexible packaging capacity up to around 35000 TPA from 29500 TPA. Once commissioned, the expanded facilities should help boost PPL’s revenues from 2012 onwards. Apart from the domestic market, PPL is also looking at strengthening its presence in overseas markets. Currently, exports account for 17-18 per cent of total revenues.

On the financial front, for H1 CY11, PPL’s revenues increased 19 per cent to Rs 400.46 crore (Rs 336.83 crore), while profits increased 11 per cent to Rs 29.67 crore (Rs 26.7 crore). Though the management has not commented on the estimates, revenues could be around Rs 800-815 crore for CY11 as a whole, while profits could be around Rs 57-60 crore. Margins look to sustain, with input prices cooling off and PPL being a virtually debt-free company (D/E ratio 0.07x). At these estimates, PPL is available at a PE and EV/EBIDTA of 8.7x and 5x respectively, which looks fair and makes it a good pick, with one-year target of Rs 100.