SUBSCRIBE To ASTRON PAPER & BOARD MILL LTD. Growing business at reasonable valuation

SUBSCRIBE To ASTRON PAPER & BOARD MILL LTD. Growing business at reasonable valuation

12th Dec 2017 Salient features of the IPO: Astron Paper and Board Mill Lmt. (APBML), incorporated in 2010, is engaged in manufacturing of kraft paper, which serves as the most suitable raw material for manufacturing of corrugated boxes. The company offers various range of products ranging from high RCT, kraft liner, liner to corrugated medium paper. Valuation : At the higher price band of Rs50, APBML s share is available at P/E multiple of 12.2x (based on FY18E annualized EPS of Rs4.1). The issue is valued in line with the peer valuation (Genus Paper & Boards Ltd. at P/E multiple of 24.5(x) and Shree Ajit Pulp & Paper Ltd. at 12.6(x) on the basis of FY18E annualized EPS. Below are few key observations of the issue: Indian paper industry has been growing at an annual growth rate of 6% to 13.9 MT by FY15 with per capita consumption of 11 kg, way lower than the developed countries annual consumption. Packaging paper & board segment which accounts for 47% of industry, is fastest growing segment of industry owing to factors such as rising urbanization, increasing penetration of organized retail and high growth in FMCG, e-commerce and pharma sectors. As per CARE, Indian paper industry is expected to grow at a CAGR of 7% over the next 5 years and will reach to the size of 20 MT/PA consumption. APBML manufactures the kraft paper which is used by packaging industry for the manufacturing of corrugated boxes and liners, corrugated sacks and composite containers. In the market place the APBML s kraft paper is perceived well in term of quality and durability. Within the short span of operations, the company has created a strong brand image in kraft paper industry also reflecting from the fact that its operating revenue (OR) grew at CAGR of 62% over the past five fiscal. During the H1FY17, the company recorded OI of Rs1,109 mn which was 60% of income generated during FY17. Given the paper industry manufacturing is more inclined towards environmental pollution, APBML since inception, has been remained environmental conscious and adopted the use of waste paper as a raw material instead of wood. Though the company uses chemicals such as starch powder, rosin for manufacturing process, the management cleared that it recycles the wastage water for further process leading to no (minimal) discharge of effluents. The company source waste paper mainly through imports for ensuring better quality of product, this also increased the business sensitivity to the exchange rate. As per management, imports remain favorable for company also because of favorable location of its manufacturing facility at Halvad, Gujarat which is approx. 200 kms away from Mundra Port. China s latest ban on imports of waste paper on account of environmental compliance has led to fall in waste paper prices in the international market. The measure is a big positive for Indian paper industry as well as APBML through improving margin as raw material prices has declined while end product s price would increase due to less supply from China. While APBML is generating business from the domestic market which is diversified across states from Gujarat to Himachal Pradesh, it is also exploring the export markets. The company will use the major portion of fresh issue (Rs230 mn) for setting up additional facility for manufacturing of kraft paper with lower GSM ranging from 80-180 GSM which will entitle the company to access the foreign markets, which prefer low GSM kraft paper. Currently the kraft paper with GSM ranging from 150-300 restricted for exports. The company has scalable business model and operated at capacity utilization at 80% during FY15-FY17 and continued to add capacities on regular basis to serve existing and additional customers. Operating cash flow (OCF) turned positive in FY15 and prudently used to fund the capex, while short term loan has increased in order to meet the increasing working capital need. APBML proposed to use Rs81 mn for part payment of loan and thus besides saving Rs7.3 mn annual finance cost, D/E ratio post issue will reduce to 0.6(x) and come in line with the peer s average. Rs239 mn will be used for working capital requirement which in turn will reduce dependence on short term loans. Revenue grew by a CAGR of 62% to Rs1,832.7 mn during FY13- FY17 with average EBIDTA margin at 11%. Average RoIC over the last three fiscals remained at 31.1% and RoE at 17.8% higher than peers. Considering all these parameters, at P/E at 12.2(x) on FY18E annualized EPS, the issue looks reasonable considering the growing business, expanding margins and strong growth drivers. Thus we assign Subscribe rating to the issue. Recommendation Price Band (per share) Face Value Shares for fresh issue Shares for OFS Fresh issue size (on Higher Price Band) Total Issue Size Subscribe Rs45-Rs50 Rs10 14 mn Nil Rs700 mn Rs700 mn Bidding Date Dec 15, 2017 - Dec 20, 2017 MCAP on Higher Price Band Book Running Lead Manager Registrar Industry Allocation detail Rs2,325.0 mn Pantomath Capital Advisors Private Limited Link Intime India Private Limited Paper Qualified Institutional Investors (QIBs) 10% Non Institutional Investors (NII) 55% Retail Individual Investors (RII) 35% Pre and post issue shareholding pattern Pre - Issue Post - Issue Promoter and Promoter Group 62.6% 43.8% Public 37.4% 56.2% Total 100.0% 100.0% Retail Application Money at Higher Cut-Off Price per Lot Number of Shares per Lot 280 Application Money Research Analyst Satish Kumar Desk Phone - 022-6707 9999; Ext: 913 e mail: satish.kumar@choiceindia.com Rs14,000.0 1

About the issue: APBML is coming up with an initial public offering (IPO) with 14.0 mn shares as a fresh issue. Post issue promoter s holding will reduce to 43.8% and public shareholding will increase to 56.2%. Asian Granito India Limited holds 8.775 mn shares or 27% pre issue stake in company. The issue will open on 15th Dec 2017 and close on 20th Dec 2017. Not less than 10% of the issue will be allocated to qualified institutional buyers. Further, not more than 55% of the issue will be available for non-institutional bidders and not more than 35% for retail investors. 0.7 mn shares or 5.0% of issue size is reserved for employees. The issue size (Rs700 mn) being lower than Rs 2,500 mn, the shares will be listed in T group, thus there will be some restrictions on the price movements. Pre and post issue shareholding pattern Pre - Issue Post - Issue Promoter and Promoter Group 62.6% 43.8% Public 37.4% 56.2% Total 100.0% 100.0% About the issue: The company will receive Rs700 mn as a fresh issue. This proceed will be used for the following purposes: Objective of the offer Rs mn Setting up of additional facility for manufacturing of Kraft Paper with lower GSM ranging from 80 to 180 GSM and lower BF ranging from 12 B F to 20 B F 230.2 Part payment of unsecured loan 81.0 Funding the working capital requirement of the company 239.0 General corporate purposes 149.8 Total 700.0 Offer Closes on 20-Dec-2017 Unblocking of ASBA Account 27-Dec-2017 Listing on Stock Exchanges 29-Dec-2017 Offer Opens on 15-Dec-2017 Finalization of Basis of Allotment 26-Dec-2017 Credit to Demat Accounts 28-Dec-2017 2

Company Introduction: Astron Paper and Board Mill Lmt. (APBML), incorporated in 2010, is engaged in manufacturing of kraft paper, which serves as the most suitable raw material for manufacturing of corrugated boxes. Within a short span of time the company has created a brand name in kraft paper industry and prepared a comprehensive range of kraft paper catering to various packaging companies and MNCs. APBML s manufacturing facility is situated at Halvad, Gujarat with an installed capacity of 96,000 mt/pa. The company offers varied products of kraft paper, which is used by packaging industry for making corrugated boxes and liners, corrugated sacks and composite containers. Through its manufacturing facility in Gujarat, the company caters the need of clients spreading across various states. Geographical customers presence for FY17 Rajasthan 12% Other 15% Uttaranchal 8% Madhya Pradesh 20% Dadra & Nagar Haveli 8% Gujarat 33% Himachal Pradesh 4% Owing to increase in environmental awareness, the company since its inception, adopted the use of waste paper as a raw material instead of traditional use of wood. The company is accredited with Authorised Economic Operator (AEO)-T1 certificate and imports raw material for ensuring the better quality and output. Manufacturing process for kraft paper is as follows: 3

Company Introduction (Continued ): The company offers various range of products ranging from high RCT, kraft liner, liner to corrugated medium paper. These products are used in corrugated industry for manufacturing of various types of packaging boxes and packaging products. APBML s plant is situated at Halvad, Gujarat is well equipped with plant and machinery, computer system and in house testing laboratory for quality control checks and testing the products. Existing unit situated on a total of 99,251 sq. mt area out of that the company currently constructed shed in 18,531 sq. mtrs. APBML s propose to set up an additional manufacturing facility available in the existing unit in balance land and shed construction will be around 6,872 sq. mtrs. Though, APBML s meets its power requirement by purchasing electricity from Torrent Power, it has also installed a in house power plant of 3 MW to support electricity requirement. Waste paper is the major raw material which the company sources from domestic as well as international market, however, major requirement is met through imports. By H1FY18 and FY17, the consumption of imported raw material and indigenous raw material constituted 90.9% and 9.1% and 88.4% and 11.6%. At present the company mainly imports from USA, UK, Central Europe and Middle East. The company is in high growth phase with operating revenue (OR) grew by a CAGR of 62% to Rs1,832.7 mn in FY17 from Rs265.9 mn in FY13. APBML has maintained the average EBIDTA margin at 11% during the same period and NPM improved to 5.4% in FY17. Standalone (Rs mn) FY13 FY14 FY15 FY16 FY17 H1FY18 CAGR (%) FY13-FY17 Y-o-Y (%) FY17 Operating revenue (OR) 265.9 1,058.4 1,519.3 1,574.9 1,832.7 1,109.5 62.0% 16.4% EBITDA 17.7 109.7 191.2 194.9 216.8 146.1 87.1% 11.2% Adjusted PAT (41.5) (30.2) 41.5 60.8 99.6 94.5 63.7% Cash Flow from Operating Activities (155.6) (66.1) 107.2 156.9 80.0 55.7 EBITDA Margin (%) 6.6% 10.4% 12.6% 12.4% 11.8% 13.2% Reported PAT Margin (%) -15.6% -2.9% 2.7% 3.9% 5.4% 8.5% RoIC (%) -6.6% -8.8% 27.4% 30.6% 36.3% RoE (%) -18.3% -12.8% 14.2% 17.2% 22.0% RoA (%) -3.7% -2.4% 3.0% 3.8% 5.8% RoCE (%) 1.1% 12.8% 26.7% 24.3% 22.0% 4

Competitive Strengths: Scalable business model Quality certification to products leading to repeated orders Location advantage Business Strategy: Setting up of additional manufacturing facility to increase product range Expanding domestic geographical reach through marketing network Continue to improve operating efficiencies through technological enhancement Plan to enter into packaging industry to expand business operations Risk and Concerns: Low entry barrier Govt s regulations towards environment pollution Sensitivity to exchange rate given the high import dependence Volatility in raw material prices 6

Peer Comparison and Valuation: Companies CMP 6M 12M M Cap FV P/E P/BV P/S EV/ CAP (Rs/s) (R%) (R%) (Rs mn) (Rs/s) (x) (x) (x) EBIDTA (x) Astron Paper & Board Ltd. 50 - - 2,325.0 Small Cap 10 12.2 1.9 1.3 14.2 Genus Paper & Boards Ltd. 12 136.2% 121.9% 3,206.4 Small Cap 1 24.5 0.9 1.0 16.8 South India Paper Mills Ltd. 128 22.5% 0.0% 1,919.3 Small Cap 10-1.5 1.0 7.5 Shree Ajit Pulp & Paper Ltd 221 0.5% 24.9% 1,183.9 Small Cap 10 12.6 1.2 0.5 8.9 JK Paper Ltd. 137 28.9% 52.2% 23,135.2 Mid Cap 10 9.9 1.6 12.6 7.1 NR Agarwal Industries Ltd. 477 57.6% 103.8% 8,118.1 Small Cap 10 10.1 3.7 2.6 8.0 West Coast Paper Mills Ltd. 303 56.9% 118.8% 20,013.2 Small Cap 2 9.9 2.8 10.2 6.9 Average 190 50.4% 70.3% 8,557.3 8 13.2 1.9 4.2 9.9 Companies Debt (Rs mn) D/E (x) Oper. Revenue in FY17 (Rs mn) At the higher price band of Rs50, APBML s share is available at P/E multiple of 12.2x (based on FY18E annualized EPS of Rs4.1). The issue is valued in line with the peer valuation (Genus Paper & Boards Ltd. at P/E multiple of 24.5(x) and Shree Ajit Pulp & Paper Ltd. at 12.6(x) on the basis of FY18E annualized EPS. Below are few key observations of the issue: Given the paper industry manufacturing is more inclined towards environmental pollution, APBML since inception, has been remained environmental conscious and adopted the use of waste paper as a raw material instead of wood. Though the company uses chemicals such as starch powder, rosin for manufacturing process, the management cleared that it recycles the wastage water for further process leading to no (minimal) discharge of effluents. The company source waste paper mainly through imports for ensuring better quality of product, this also increased the business sensitivity to the exchange rate. As per management, imports remain favorable for company also because of favorable location of its manufacturing facility at Halvad, Gujarat which is approx. 200 kms away from Mundra Port. China s latest ban on imports of waste paper on account of environmental compliance has led to fall in waste paper prices in the international market. The measure is a big positive for Indian paper industry as well as APBML through improving margin as raw material prices has declined while end product s price would increase due to less supply from China. While APBML is generating business from the domestic market which is diversified across states from Gujarat to Himachal Pradesh, it is also exploring the export markets. The company will use the major portion of fresh issue (Rs230 mn) for setting up additional facility Net Worth (Rs mn) OI CAGR (FY15- FY17) Avg. EBIDTA Mar. (%) FY15- FY17 Avg. RoE (%) FY15- FY17 Avg. RoCE (%) FY15-FY17 EV (Rs mn) FY18E Annzed. EPS Astron Paper & Board Ltd. 861.6 0.7 1,832.7 1,240.3 9.8% 12.3% 17.8% 24.3% 3,124.4 4.1 Genus Paper & Boards Ltd. 483.4 0.1 3,086.9 3,453.6 3.4% 8.1% 2.3% 4.6% 3,640.6 0.5 South India Paper Mills Ltd. 420.2 0.3 1,952.7 1,313.7 2.6% 16.4% 14.3% 19.4% 2,318.0 - Shree Ajit Pulp & Paper Ltd 541.9 0.6 2,264.9 971.6 5.7% 10.0% 10.5% 14.3% 1,714.2 17.6 JK Paper Ltd. 13,269.2 0.9 26,286.1 14,854.1 10.3% 15.7% 18.3% 9.7% 36,189.8 13.8 NR Agarwal Industries Ltd. 2,641.6 1.2 10,405.9 2,185.9 19.8% 8.2% 13.2% 13.7% 10,722.4 47.0 West Coast Paper Mills Ltd. 3,446.3 0.5 17,693.4 7,210.6 3.6% 16.2% 7.5% 10.0% 23,328.7 30.7 Average 3,094.9 0.6 9,074.7 4,461.4 7.9% 12.4% 12.0% 13.7% 11,576.9 19.0 *-FY17 operating income (OI), Used post issue BVPS for manufacturing of kraft paper with lower GSM ranging from 80-180 GSM which will entitle the company to access the foreign market, which require low GSM kraft paper. Currently the kraft paper with GSM ranging from 150-300 is not eligible for exports. The company has scalable business model and operated at capacity utilization at 80% during FY15-FY17 and continued to add capacities on regular basis to serve existing and additional customers. Operating cash flow (OCF) turned positive in FY15 and prudently used to fund the capex, while short term loan has increased in order to meet the increasing working capital need. APBML proposed to use Rs81 mn for part payment of loan and thus besides saving Rs7.3 mn annual finance cost, D/E ratio post issue will reduce to 0.6(x) and come in line with the peer s average. Rs239 mn will be used for working capital requirement which in turn will reduce dependence on short term loans. Revenue grew by a CAGR of 62% to Rs1,832.7 mn during FY13-FY17 with average EBIDTA margin at 11%. Average RoIC over the last three fiscals remained at 31.1% and RoE at 17.8% higher than peers. Considering all these parameters, at P/E at 12.3(x) on FY18E annualized EPS, the issue looks reasonable considering the growing business, expanding margins and strong growth drivers. Thus we assign Subscribe rating to the issue. 7

Financial Statements (Standalone, Rs mn) P&L FY13 FY14 FY15 FY16 FY17 H1FY18 Operating Income (OI) 265.9 1,058.4 1,519.3 1,574.9 1,832.7 1,109.5 Cost of raw material consumed (210.8) (690.2) (970.3) (984.3) (1,106) (722.0) Purchase of Stock -in - trade (17.9) (56.6) Change in inventories of finished goods, traded goods and work-inprocess 40.4 (4.8) 5.1 (0.1) (11.4) 19.8 Employee benefit expenses (15.7) (53.1) (63.8) (66.3) (77.2) (42.2) Other expenses (62.2) (200.5) (299.2) (311.4) (364.4) (219.0) EBITDA 17.7 109.7 191.2 194.9 216.8 146.1 Depreciation and Amortization Expenses (10.1) (31.9) (26.6) (27.9) (32.5) (17.1) EBIT 7.6 77.8 164.6 167.0 184.4 129.0 Finance Costs (29.6) (95.4) (107.0) (107.0) (113.0) (58.2) Other Income 1.3 3.6 2.2 3.6 13.2 0.1 PBT (20.6) (14.0) 59.9 63.6 84.7 70.9 Tax Expenses (20.9) (16.2) (18.4) (2.7) 14.9 23.6 Adjusted PAT (41.5) (30.2) 41.5 60.8 99.6 94.5 Balance Sheet FY13 FY14 FY15 FY16 FY17 H1FY18 Share Capital 270.0 310.0 325.0 325.0 325.0 325.0 Reserves and Surplus (43.3) (73.5) (32.3) 28.6 128.2 215.3 Long Term Borrowings 445.5 370.0 323.4 332.1 384.9 347.8 Long Term Provisions 0.2 0.3 0.8 1.4 1.4 1.9 Deferred tax liabilities (Net) 21.2 37.3 55.7 58.4 43.5 19.9 Other non current liabilities 80.8 86.9 86.0 129.2 41.1 41.0 Short Term Borrowings 113.0 283.6 328.5 371.3 426.9 513.8 Trades Payables 135.8 155.9 175.8 219.4 252.3 250.1 Other Current Liabilities 84.5 95.8 99.6 105.7 105.6 89.6 Short Term Provisions 9.8 13.4 18.6 18.6 Total Liabilities 1,107.5 1,266.3 1,372.4 1,584.5 1,727 1,823.0 Tangible Assets 653.0 670.9 657.6 746.7 789.7 794.2 Intangible Assets 0.2 0.2 0.8 0.8 0.9 0.5 Capital Work In Progress 11.8 3.1 10.8 13.9 16.9 Non-current investments 0.3 0.5 0.5 0.0 0.0 Long-term loans and advances 0.1 0.1 0.2 0.2 0.1 0.1 Inventories 142.7 230.1 341.6 352.9 423.6 415.2 Trade Receivables 150.5 284.2 285.5 371.4 349.3 464.4 Cash and Bank Balances 70.0 28.2 33.5 53.0 60.6 62.2 Short Term Loans and Advances 79.0 48.8 41.8 58.8 89.4 69.5 Other Current Assets 0.2 0.2 0.7 Total Assets 1,107.6 1,266.3 1,372.4 1,584.4 1,727 1,823.0 Cash Flow Statement FY13 FY14 FY15 FY16 FY17 H1FY18 Cash Flow from Operating Activities (155.6) (66.1) 107.2 156.9 80.0 55.7 Cash Flow from Investing Activities (270.1) (39.4) (19.5) (103.5) (84.4) (24.0) Purchase of fixed assets and properties (271.4) (42.1) (21.7) (106.1) (89.4) (24.1) Cash Flow from Financing Activities 482.5 63.7 (82.5) (34.0) 12.0 (30.1) Net Cash Flow 56.8 (41.8) 5.3 19.4 7.6 1.6 Opening Balance of Cash and Bank Balances Closing Balance of Cash and Bank Balances 13.2 70.0 28.2 33.5 53.0 60.6 70.0 28.2 33.5 53.0 60.6 62.2 Ratios FY13 FY14 FY15 FY16 FY17 OI Growth Rate (%) 298.0% 43.5% 3.7% 16.4% EBITDA Growth Rate (%) 520.6% 74.2% 2.0% 11.2% H1 FY18 EBITDA Margin (%) 6.6% 10.4% 12.6% 12.4% 11.8% 13.2% EBIT Growth Rate (%) 921.1% 111.5% 1.5% 10.4% EBIT Margin (%) 2.9% 7.4% 10.8% 10.6% 10.1% 11.6% Adjusted PAT Growth Rate (%) -27.2% - 46.7% 63.7% 237.2% Reported PAT Margin (%) -15.6% -2.9% 2.7% 3.9% 5.4% 8.5% Turnover ratios Trade Receivable Turnover Ratio (x) 1.8 3.7 5.3 4.2 5.2 2.4 Accounts Payable Turnover Ratio (x) 2.0 6.8 8.6 7.2 7.3 4.4 Fixed Asset Turnover Ratio (x) 0.4 1.6 2.3 2.1 2.3 1.4 Total Asset Turnover Ratio (x) 0.2 0.8 1.1 1.0 1.1 0.6 Working Capital Turnover Ratio (x) (2.6) (5.0) (6.3) (5.9) (6.3) Liquidity ratios Current Ratio (x) 0.9 0.7 0.6 0.7 0.6 0.7 Debt to Equity (x) 2.5 2.8 2.2 2.0 1.8 1.6 Total Debt (Rs.) 558.5 653.6 651.9 703.4 811.8 861.6 Net Debt (Rs.) 488.5 625.4 618.4 650.4 751.2 799.4 Net Debt to EBITDA (x) 27.6 5.7 3.2 3.3 3.5 5.5 Net Debt to Equity (x) 2.2 2.6 2.1 1.8 1.7 1.5 Return ratios RoE (%) -18.3% -12.8% 14.2% 17.2% 22.0% RoA (%) -3.7% -2.4% 3.0% 3.8% 5.8% RoCE (%) 1.1% 12.8% 26.7% 24.3% 22.0% Per share ratios Restated Adjusted EPS (Rs.) (0.9) (0.6) 0.9 1.3 2.1 4.1 Restated BVPS (Rs.) 4.9 5.1 6.3 7.6 9.7 11.6 Restated Operating Cash Flow Per Share (Rs.) (3.3) (1.4) 2.3 3.4 1.7 1.2 Valuation ratios P/E (x) (56.0) (77.0) 56.1 38.2 23.3 12.3 P/BVPS (x) 10.3 9.8 7.9 6.6 5.1 4.3 EV/EBITDA (x) 159.1 26.9 15.4 15.3 14.2 Source: Company RHP 9

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