Yash Papers, a leading manufacturer of low grammage kraft paper, is coming out with a fixed price public issue of 1,68,00,000 equity shares of Rs 10 each for cash at a price of Rs 14 per share. The issue opens on the 30 June 2005 and closes on 8 July 2005.

Out of the total offer, promoter participation will be 33,60,000 share, i.e., 20% of the proposed issue, at a price of Rs 14 per share.

Yash Papers was promoted by late K.K.Jhunjhunwala, a paper technologist. The other promoters are the managing director of the company, Ved Krishna, 30, a management graduate from the University of North London, and. Manjula Jhunjhunwala, 52, BA (Hon.) and B.Ed.

At present , Yash Papers has a 40% market share of the kraft paper market and has targeted a 20% market share in poster grades, post expansion.

The funds from the IPO will be used to set up:

· 70-tonne per day (tpd) specialty poster paper line.

· 130-tpd integrated pulp line.

· 6-MW captive power unit.

· A chemical recovery unit.

The project will be commissioned in October 2006.

Strengths

· A leading manufacturer in a niche segment (kraft) of the paper industry. Post-expansion to foray into another niche segment of poster-grade paper for which demand is expected to rise at a higher pace of around 7-9%.

· Though other players in the industry are also expanding, the segments they are targeting are printing & writing paper and not poster-grade paper, which provides higher operating margin.

Weaknesses

· Low promoter holding: The post-issue shareholding of the promoters will come down from 40.45% to 23.83%.

· Raw material constraints: The availability of raw materials (bagasse and wheat straw) used is subject to monsoon. Most of the sugar mills located near the factory have started using bagasse as an alternate fuel, creating a shortage. The shortage of raw material may increase the cost of production, adversely affecting the margin.

· The poster-grade segment is highly fragmented. There are many unorganised players in this segment.

· The cost of the project is around Rs 85 crore, of which the balance amount other than the public offer is through borrowings. The rate of interest is 9.25%. As the turnover of the company in the year ended December 2004 was Rs 25.84 crore, the project is of a very large size and so also the risks involved. Paper is a cyclical industry. If after the expansion revenues are not on expected lines, it will be difficult to service even the debt component.

Valuation

The market price of the company as on 28th June was Rs 26. The 52-week high was Rs 37.25 (30 May 2005) and 52-week low was Rs 8.55 (1 July 2004). The average monthly price in the last six months was not more than Rs 25. The trailing 12-month P/E ratio of the company as on 23 June was just 6.3 compared to the industry P/E ratio of higher than 11. However, the average P/E ratio of small and medium paper companies is around 4.8.

While there is no major player in the poster-grade segment, Star paper mills is an important player in the kraft paper category. Star Paper, as on 28 June, was trading at a TTM P/E ratio of 5.1. On a post-equity capital of Rs 20.67 crore, Yash Paper’s FY 2004 EPS (year ended December 2004) comes to just Rs 0.80. The resultant P/E ratio at the issue price of Rs 14 comes to 17.5.