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S. Vaidya Nathan

SHAREHOLDERS of West Coast Paper can stay invested and look at profit-booking opportunities if the stock price moves up by around Rs 20-25 from present levels. However, investors who had entered the stock at considerably low prices can contemplate at least partial profit-booking now.

The stock trades at a price earnings multiple of less than three times its likely per share earnings for 2002-03.

Even in good times, paper industry stock PEMs have hovered around five. West Coast Paper has also generally commanded a low PEM. The stock, which trades at around Rs 90, had a yearly high of Rs 113. In this backdrop, there may be room for some upside as the firm trends in paper prices appear set to prevail for at least the next couple of quarters.

But investors have to use any further rise to cut exposures as a buy-and-hold approach may not pay off. Especially in an industry such as paper, which is prone to sharp turns in business cycles. The industry outlook for the next six months suggests that the firm trends of the last eight months may largely continue though there are some signs of softness in South-East Asian markets.

The improvement in international price levels has enabled domestic producers to push through two or three rounds of hikes in paper prices in 2002. This coupled with steady volume growth has reflected in an improved showing by players almost across the board.

West Coast Paper, as one of the larger players, is no exception and it has turned in a fairly good performance in 2002-03 first half. The company's move in July 2002 to drop a proposed rights offer of equity as well as optionally convertible debentures has also helped in improving the stock valuation.

West Coast Paper has generally managed to weather even downturns reasonably well. With the industry doing well now, the profitability levels have improved sharply.

The company has a small presence in the telecom cables business, which has served as a drag on profits and resources. For the first half of 2002-03, on sales of Rs 7.2 crore (less than 5 per cent of sales), this business has posted losses of Rs 2.9 crore. The capital employed at Rs 42.8 crore accounts for 17 per cent of the total but this has not delivered the goods. The paper and paperboard business has turned in a smart performance burying the losses of the telecom business.

For the April-September 2002 period, sales were at Rs 185.2 crore, operating profits at Rs 29.1 crore and post-tax earnings at Rs 17.6 crore. On an equity base of Rs 8.9 crore, the earnings per share for the six months works out to Rs 19.7. The performance in the second-half may more or less be on similar lines, barring any sharp decline in paper prices, which appears rather unlikely.

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