ACKNOWLEDGEMENT

The success of this study was undoubtedly ensured by the support of a lot of people, many of whom I would like to acknowledge. First and foremost, special thanks go to my supervisor, Prof. P. P. Ghosh for all his willingness to respond to my questions, support, and constructive criticism and guidance in completing this report. He helped and encouraged me a lot in this research work & safeguarded the completion of this research and supported the purpose of my study right from the beginning. The supporting teacher often invested additional time in the project and did everything in his power to ensure the quality of the project which resulted in a great impact on the success of this work. Thanks to my friend Ghanshyam Agarwal, student of ICFAI, who acted as an advisor of the study. He also helped me in calculating value of Beta in the project. It was very difficult to find the right words to express what a great honour it was for me to work with two extremely courageous and open-minded men (as mentioned above) who inspired & appreciated me a lot and without whose help I could not have finished this project. The data for the project has been collected from various sources like magazines, newspapers, websites, books etc. for a detailed study of the subject. Thank you all for your kind support, guidance, comments on my research during the long process of evaluating the project in the field and writing up the results. My final acknowledgement is to my parents who always supported me in my aims and goals.

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METHODOLOGY
The data used for this project preparation has 2 parts :

PRIMARY DATA
Lack of proper sources to reach and to have a discussion with the people at higher post made it difficult to collect primary data. On the other hand massive time constraint also created problem for the purpose of gathering the views of people at higher post from various industries across the board. So I approached my supervisor Prof. P. P. Ghosh and one of my friends named Ghanshyam Agarwal for giving their views about the paper industry. So I would like to thank them for taking out some time for me from their precious time and share their views and projecting the study.

SECONDARY DATA
In this research work most of the content has been obtained from secondary sources like newspapers, magazines, books websites etc., which helped for calculation of various terms used for the evaluation purpose in course of security analysis for paper industries.

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OBJECTIVE OF THE STUDY

The objective of the project work is given here under : 1. Analysing the intrinsic value of the securities of the selected 3 listed companies and comparing it with the market price of the securities on a certain date (i.e. 1st April 2008)and taking decision whether the stock is undervalued or overvalued. 2. Applying Michael Porters 5 Force Model in security analysis for paper industry and analysing the effects of all the forces on the industry and on the securities as a whole, whether there is positive or negative effect.

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INTRODUCTION INTRODUCTION OF THE STUDY

Demand for paper is increasing over the years. . So we can say that this will positively affect the profit of the paper industry. This growth in profit will definitely attract the investors and therefore there is a need of security analysis and equity valuation for the paper industry to project its performance in the future. This will help the investors to ascertain their returns. With reference to this project work, the methods of valuation of firm, demand of paper in future, calculation of intrinsic value of firm and accordingly calculation of the prices of securities has been done to compare it with current market price of the securities. Michael Porters 5 Force Model has been applied to the industry for security analysis purpose. Calculation of cost of equity shares, risk free rate of return, return on market portfolio, beta calculation, Weighted Average Cost of Capital (WACC), free cash flow available, Terminal value & finally calculation of intrinsic value of the securities has been done. After calculation of this, comparison has been made with market value of the securities and investment suggestion is drawn. Lastly Michael Porters 5 Force model has been applied to do the security analysis of the paper industry and conclusion is drawn along with mentioning limitations.

HISTORY OF PAPER INDUSTRY

The first paper mill in India was established in the year 1832. Today, among the top 15 global players, the Indian paper industry contributes Rs.25 billion to the Indian government and provides employment to around 1.3 million people in the country. There are about 666 industrial units involved in the manufacture of pulp, paper, out of which nearly 568 are in operation. Growing three times the rate of global average, the Indian paper industry is poised to grow to 14 million tonnes in 2015-16 from 7.2 million tonnes in 2005-06.

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KEY INDICATORS
Indicator Paper: Production Paper: Export value Paper: Import value Paper: Sales value Paper: Market size Paper: Domestic consumption Units Tonnes Rs.crore Rs.crore Rs.crore Rs.crore Rs.crore Dec-01 4833665 559.3 662.8 12600 13262.8 12703.5 Dec-02 4950302 614.3 648.4 13400 14048.4 13434.1 Dec-03 5239181 812.6 745.1 14000 14745.1 13932.5 Dec-04 5556017 712.5 1057.8 15500 16557.8 15845.4 Dec-05 5792846 870.9 1046.2 16000 17046.2 16175.3

VALUATION OF FIRM
Valuation of a firm is done in order to know the intrinsic value of a firm. Knowing what an asset is worth and what determines that value, in deciding on the appropriate price to pay or receive is the main task for the valuation. We should not buy assets for aesthetic or emotional reasons rather we must buy financial assets after comparing the cash flows that we expect to receive from them with the initial cash outflow. Consequently, perceptions of value have to be backed up by reality, which implies that the price we pay for any asset should reflect the cash flows it is expected to generate. The main objective of any valuation is to know whether the underlying assets is undervalued or overvalued. If it is undervalued then its purchased and on the other hand if its overvalued then it is sold. Here one assumption is made by the analyst that the market is inefficient and make mistake in assessing the value. All the information is not reflected in the market price and it take time for the market to absorb all the fundamental information. There are various models, by which we can calculate the intrinsic value of assets such as : 1. Discounted cash flow method, 2. Relative method, etc.
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SCENARIO OF INDIAN PAPER INDUSTRY

I have chosen the paper industry because in India it is more than a century old. At present there are over 600 paper mills manufacturing a wide variety of items required by the consumers. These paper mills are manufacturing industrial grades, cultural grades and other specialty papers. The paper industry in India could be classified into 3 categories according to the raw material consumed. 1. Wood based 2. Agro based and 3. Waste paper based While the number of wood based mills is around 20 and balance 580 mills are based on non-conventional raw materials. Government has completely de-licensed the paper industry with effect from 17th July, 1997. The Paper industry is a priority sector for foreign collaboration and foreign equity participation up to 100% receives automatic approval by Reserve Bank of India. Several fiscal incentives have also been provided to the paper industry, particularly to those mills which are based on non-conventional raw material. It is estimated that the paper industry would be growing at the present rate of 7-8% of compounded rate and would require 9.5-10 million tonnes by the end of the decade from the existing production of around 6.7 million tonnes.

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A LOOK AT THE OPERATION CYCLE OF THE PAPER INSUSTRY

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GROWTH IN DEMAND OF PAPER IN INDIA

The demand is growing @ 7% to 8% Compounded Annual Growth Rate (CAGR) per Annum. Demand in Million tonnes is 8.100 by 2006-07, 8.500 by 2007-08 and 9.000 by 2008-09 respectively.

INDIAN PAPER DEMAND VS. WORLD PAPER DEMAND

Paper is an essential commodity. Its per capita consumption is currently 7 kg, one of the lowest in the region. World paper demand growth is subdued and is between 2-3 per cent, against Indias 8 per cent. This high growth rate has been possible by a strong emphasis on literacy, increase in per-capita income, increasing use of photocopiers and printers, higher export growth and demand for high quality packaging. Indias total annual production and consumption of paper and paper board is around 8 million tonnes barely 2 per cent of global production. It is projected that Indias paper demand would reach 17 million tonnes by year 2015.

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NEEDS OF INDIAN PAPER INDUSTRY FOR BEING GLOBALLY MORE COMPETETIVE

i. Sustained availability of good quality of raw materials (forest based) and bulk import of waste paper to supplement the availability of raw materials. ii. iii. iv. v. Adequate modernization of the manufacturing assets. Improvement of the infrastructure. Quality improvements and reduction in cost of production Import policy conducive for import of material, equipment, instruments, raw materials and technologies which are bearing of the quality and environment.

PAPER PRICES FIRMING UP ON INFLATIONARY PRESSURES

Paper prices are headed north with leading manufacturers such as JK Paper and Ballarpur Industries Ltd (BILT) revising prices due to rise in input costs and buoyant market demands. The inflationary cost is showing on the industry. JK Paper has increased the prices of coated paper by Rs 2,000-2,500 a tonne in the beginning of the year 2008-09. This is in the backdrop of a higher input cost. It didnt make enough margins on coated paper last year. The drastic price reduction last year has impacted the bottom lines as well. The international prices of coated paper have also gone up from as low as $850 last year (2007-08) to $950-960 in present year (2008-09) The price rise was on account of rising input costs, mainly wood and bamboo, along with other raw materials and chemicals. The pulp prices have risen by almost 15 per cent in the last 12-18 months.

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ORGANISATIONAL OVERVIEW
ANDHRA PRADESH PAPER MILLS LTD.
Incorporated on 29th June 1964 as "The Andhra Pradesh Paper Mills Ltd." at Rajahmundry. The Certificate of Commencement of business was obtained on 10th July 1964. Formed with infusion of funds and high caliber management of the well-known industrial house of Bangurs of Calcutta, who have interests in textile manufacturing, tea plantation, wind energy generation and trading and investment business other than paper. In 2001, Coastal Papers Ltd was taken over by the company. The production capacity of both the units put together is 1,53,500 TPA. Eight paper machines installed at the two locations which produce papers of different M.F & M.G varieties in the range of 21 to 250 GSM as well as newsprint. With the commissioning of largest continuous digester in the country, the total bleached pulp production at APPM (Unit Rajahmundry) is 1,81,500 TPA. The estimated paper production will increase to 1,74,500 TPA after the completion of the paper machine modernization plan. Provides direct employment to over 4000 families. Moreover, the company provides livelihood to over 10,000 families through indirect job opportunities.

JK PAPER MILLS LTD.

India's largest producer of branded papers is also a leading player in the Printing and Writing segment. Operates two paper plants in India, JK Paper Mills in Rayagada, Orissa, with a capacity of 125,000 tonnes per year and Central Pulp Mills, located at Songadh, Gujarat, with a manufacturing capacity of 55,000 tonnes per year. Both the manufacturing units of the Company are ISO 9001-2000 compliant.
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A plant to manufacture 60,000 tonnes per year of industrial packaging board in Gujarat is under implementation. The plants currently operate at more than 120% capacity utilisation with an aggregate annual output of over 180,000 tonnes per year of Paper and Pulp, using contemporary technology.

Produce international quality coated art paper and boards, being marketed in the brand name of JK Cote. Various brand names, JK Copier, JK Excel Bond, JK Bond, JK Savannah, JK Copier Plus and JK Easy Copier, where JK Copier is the Company's flagship brand. Sells through a nationwide distribution network of approximately 100 distributors and 2500 dealers. Only Company in the industry with such a large share of branded products in its portfolio. Environment-friendly technologies. Both the units of the Company are ISO 14001 certified for their eco-friendly operations. In-house research programme, have covered more than 45,000 hectares of land. Helping very large number of farmers in the states of Orissa, Chhattisgarh, West Bengal, Andhra Pradesh, Gujarat and Maharashtra to improve their economic well being. Export footprint for high value branded products in the Middle East, South East Asia, SAARC and various African countries.

WEST COAST PAPER MILLS LTD.

Established in the year 1955 at Dandeli, Karnataka. Flagship company of SK Bangur Group, based at Kolkata. Over the past five decades the Company has exemplified all the qualities of leadership in the Industry, with a vision to make the nation self reliant in paper production. Today Products of the company address the writing, printing and packaging demands of millions of customers across the globe. An ISO 9001:2000 accredited by the DNV, the Netherlands.

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looking ahead and is sensitive to meet the emerging challenges and trends. Actively engaged in Research and Development to design and develop the products for tomorrows needs. Has a progressive outlook that will take it through a second innings, with goals, plans and a vision to take it forward through the next 50 years. Comprises rich goodwill, process and product knowledge, trend reading capability and distribution depth. Designed to manufacture 18,000 MT per year of writing, printing and packaging paper. Implemented the Crash program in 1974 to increase production capacity to 60,000 TPA against the license issued in July 1972 for 60,000 TPA. The paper industry has been de-licensed from July 1997. The production capacity has increased to 119750 TPA after successful completion of modernization / expansion program in 1999. Thirteen awards conferred by the National Productivity Council (Government of India) and other organizations including Chemical & Allied Products, Export Promotion Council.

Excellent track record of timely repayment of loans/ lease rentals to financial institutions and leasing companies and has maintained such record even in the recession period to which this industry has been subjected many a times. This has been highly appreciated by the financial institutions & lessors.

The performance of the company during the last 5 years period was as under: YEAR ENDED 31st MARCH 2004 2005 2006 2007 2008 PRODUCTION (PAPER & BOARD) [in M.T.] 1,63,714 1,73,070 1,76,221 1,78,871 1,69,891 NET SALES WITH EXCISE DUTY 491.84 533.35 606.84 619.44 652.66 GROSS PROFIT [Rs. in Crores] 60.57 56.48 69.22 95.52 114.38

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SECURITY ANALYSIS APPLYING VALUATION METHODS

DISCOUNTED CASH FLOW METHOD
In discounted cash flow valuation the value of assets is the present value of the expected cash flow on the assets. Almost each and every asset has an intrinsic value that has to be computed based upon its characteristic in terms of cash flow, growth and risk. Data that are required to calculate discounted cash flow (DCF) value are: Estimated life of the asset. Estimated cash flows during the life of the asset. Estimated discount rate to apply to these cash flows to get present value.

Three companies that I have chosen in this sector are as follows1. ANDHRA PRADESH PAPER MILLS LTD. 2. JK PAPER MILLS LTD. 3. WEST COAST PAPER MILLS LTD. The Equity capitalization of the Paper Industry is around Rs. 778 crore. For the purpose of valuation of companies we have chosen: 1. Andhra Pradesh Paper Mills whose equity capital is Rs. 25.73 crore which is medium sized company as compared to the industry, 2. JK Paper Mill whose Equity capital is Rs. 78.15 crore which is a large player in the industry and 3. West Coast Paper whose equity capital is Rs. 11.48 crore which is a smaller player. The companies of different sizes based upon the equity capitalization are chose for the purpose of analysis to reflect a true picture of the whole paper industry as far as possible. This enabled me to know the insights of the policies and management style of these companies which have a direct impact on the financials of the companies like whether the companys growth rate is above or below the industrys growth rate, the trend of the growth in sales revenue, profit after tax, etc.

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DISCOUNT RATE
Discount rate is the rate which is used to calculate the present value of future cash flow. Generally weighted average cost of capital (WACC) is used as a discount rate to calculate the value of a firm, while cost of equity is used to calculate the value of equity. Cost of equity is the minimum rate of return required by the equity shareholders. It can be calculated by using Capital Assets Pricing Model (CAPM). CAPM was developed by William F Sharpe, John Lintner and Jan Mossin. The CAPM establishes a linear relationship between the required rate of return of a security and its systematic risk or beta. The CAPM is represented mathematically by Kj = Rf + Bj (Km Rf) Where, Kj Rf Bj Km = = = = required rate of return on security j Risk-free rate of return Beta coefficient of security j Return on market portfolio

ASSUMPTIONS OF CAPM
Investors are risk-averse and use the expected rate of return and standard deviation of return as appropriate measures of return and risk respectively for their stocks. Investors make their investment decisions based on a single-period horizon. Transaction costs in financial markets are low enough to ignore and assets can be bought and sold in any unit desired. The investor is limited only by his wealth and the price of the asset. Taxes do not affect the choice of buying assets.

RISK FREE RATE OF RETURN

In order to calculate the cost of equity at first we need to know the risk free rate of return. Risk free rate of return is the rate of return earned by the investor by investing in the risk less security says Treasury bill or long term government bonds. In this case Rf is equal to 7.6%. (I have taken interest rate of 10 year government bond because for the

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valuation of a firm I need to discount the expected free cash flow generating from the firm in the coming five to six years).

RETURN ON MARKET PORTFOLIO

Then we need to calculate the return on market portfolio. Here I have taken the S&P CNX Nifty as the representative of the market as the equity share of these three companies is listed in National Stock Exchange and moreover price of these share are taken from Nifty. In order to calculate the Km at first I have calculate the yearly return of Nifty for last 6 year by the formula = x 100 %.

For example for the year of 2006-07, 3rd April, 2006 Nifty was 3473.3 and on 31st March, 2007 was 3821.55 so yearly returns is x 100 % = 10.02%

Similarly I calculated the yearly return of other years from 2002 to 2007 as shown in TABLE 1 below and found their average as 39.35%. TABLE 1 NIFTY YEAR 03-04 04-05 05-06 06-07 07-08 OPENING POINT (A) 984.30 1,819.65 2,067.65 3,473.30 3,633.60 CLOSING POINT (B) (C ) = (B)-(A) 1,771.90 2,035.65 3,402.55 3,821.55 4,734.50 787.60 216.00 1,334.90 348.25 1,100.90 AVERAGE (C )*100 / (A) 80.02% 11.87% 64.56% 10.03% 30.30% 39.35%

BETA CO-EFFICIENT OF SECURITY

Now we need to calculate the beta of a stock. Beta () is a measure of nondiversifiable risk. It is the basis of explaining the relationship between the return of a particular security and the return of the stock market as the whole. It measures the responsiveness of the security to the general market and indicates how extensively the return of the security will vary with the changes in the market return. For example if beta of a security is 2 then it means that if market return increases by 10% then return of a
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security will increase by 20%. A high beta indicates that company is a risky proposition for the investment purpose. A low beta indicates that investment is comparatively less risky than the entire stock market taken as a whole. Since risk and return are directly related, the return from high beta related companies shall be higher than that of low beta companies. Beta of a stock is calculated by using the formula _ _ _ _ _ (where x refers to Equity Stock and z to market) COVARIANCE Covariance is applied to the annual rates of return of different investments, to measure the correlation of their year to year fluctuations in performance. Covariance (x, z) = 1/n * (x i x ave) * (z i z ave) _ _ _ _ _ (where the terms x i and z i are actual values of the annual rates of return of equity stock and market respectively, taken over several years, n is the total number of values of x i and z i used, and x ave and z ave are the average values of x i and z i) VARIANCE Variance is applied to the annual rate of return of an investment, to measure the investment's volatility, or "risk". Variance (z) = 1/n * (z i z ave)2 _ _ _ _ _ (where the terms z i are actual values of the markets annual rate of return, taken over several years, n is the number of values of z used, and z ave is the average value of the z I) Beta of these three companies has been calculated and shown in TABLE 5 below.
i

COST OF EQUITY
Now after knowing all the three factors that are required to calculate the cost of equity I have calculate it using the formula Kj = Rf + Bj (Km Rf) TABLE 2 COMPANY NAME AP PAPER MILLS JK PAPER MILLS WEST COAST
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Rf 7.60 7.60 7.60

Bj 0.35 0.71 0.28

Km 39.35 39.35 39.35

Rf + Bj ( Km - Rf ) 18.71 % 30.14 % 16.49 %

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So cost of equity of all the companies has been shown in TABLE 5 below.

PRE TAX COST OF DEBT

Pre tax cost of debt has been taken from the balance sheet of the respective companies by applying the formula : _ _ _ _ _ (where TAX is assumed to be 35% ) So Pre Tax Cost Of Debt of all the companies has been shown in TABLE 5 below.

WEIGHT OF EQUITY AND DEBT

The weighted average is found out by giving the respective weights to both equity and debt. There are two methods by which we can calculate the weight one by book value and other by market value. In this case I have used the book value weight. [Weight of equity=equity / (equity + debt) & Weight of debt = 1- Weight of equity ; Weight of debt=debt / (debt + equity) & Weight of equity = 1- Weight of debt] Here equity means sum of paid up equity share capital and reserve and surplus while debt means both long term secured and unsecured loan. TABLE 3 VALUE OF EQUITY DEBT (A) (B) 416.43 518.83 392.58 721.32 401.97 405.07 WEIGHT OF EQUITY DEBT (A) / (A)+(B) (1 - Wt. of Eq) 0.45 0.55 0.35 0.65 0.50 0.50

COMPANY NAME AP PAPER MILLS JK PAPER MILLS WEST COAST

So weight of equity and debt for all the companies has been calculated and shown in the TABLE 5 below.

DISCOUNTING RATE
Now the formula for calculating discounting rate is: (Cost of equity wt. of equity) + (cost of debt wt. of debt) (1 tax rate) Here tax is assumed to be 35 %. Therefore 1 tax rate = 65 %
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TABLE 4 COST OF WEIGHT OF EQUITY DEBT EQUITY DEBT (A) (C) (B) (D) 18.71 13.3 0.58 0.42 30.14 14 0.68 0.32 16.49 18.4 0.47 0.53 DISCOUNTING RATE (A)*(B) + (C)*(D)*65% 13.07% 16.46% 14.23%

COMPANY NAME AP PAPER MILLS JK PAPER MILLS WEST COAST

So WACC of all the companies has been calculated and shown in TABLE 5 below.

WEIGHTED AVERAGE COST OF CAPITAL (WACC)

TABLE 5
PARTICULARS BETA COST OF EQUITY PRE TAX COST OF DEBT BOOK VALUE OF EQUITY BOOK VALUE OF DEBT WEIGHT OF EQUITY WEIGHT OF DEBT WACC AP PAPER MILLS 0.35 18.71% 13.30% 416.43cr. 518.83cr. 0.44 0.56 13.07% JK PAPER MILLS 0.71 30.14% 14% 392.58cr. 721.32r. 0.35 0.65 16.46% WEST COAST 0.28 16.49% 18.40% 401.97cr. 405.07cr. 0.50 0.50 14.23%

COMPOUNDED ANNUAL GROWTH RATE (CAGR)

After calculating the WACC we need to calculate the expected future cash flow for that we need to prepare the forecasted profit and loss account of the company. But before doing that I calculated the compounded annual growth rate (CAGR) of sales. Sales of ANDHRA PRADESH for the year ending March04 are Rs. 449.44cr. and for the year ending March08 is Rs. 628.24cr. So CAGR is the value of g in following equation449.44 (1+g)4 = 628.24 Or, Or, Or, (1+g)4 = 628.24/449.44 = 1.3978 1+g = (1.3978)1/4 = 1.0873 g = 1.0873 1 = 0.0873 = 8.73%

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Similarly for JK PAPER MILLS LTD. CAGR has been calculated as 723.99 (1+g)4 = 999.08 Or, Or, Or, (1+g)4 = 999.08/723.99 = 1.3799 1+g = (1.3799)1/4 = 1.0838 g = 1.0838 1 = 0.0838 = 8.38% 575.78 (1+g)4 = 652.83 Or, Or, Or, (1+g)4 = 652.83/575.78 = 1.1325 1+g = (1.1325)1/4 = 1.0316 g = 1.0316 1 = 0.0316 = 3.16% So CAGR of all the companies has been calculated and shown in TABLE 6 below.

For WEST COAST PAPER MILLS LTD. CAGR has been calculated as

SALES FORECASTING
Keeping the same growth rate of the sales I have forecasted the sales for the coming five years as sales for the year 2009 of ANDHRA PRADESH is sales of the year 2008 (1+ g) = Rs. 628.24 (1+0.0873) cr. = Rs. 725.57 cr. Similarly sales of JK PAPER MILLS LTD. for the year 2009 =Rs. 999.08 (1+0.0838) cr. = Rs. 1095.49 cr. For WEST COAST PAPER MILLS LTD. Sales for 2009 =Rs. 652.83 (1+0.0316) cr. = Rs. 689.47 cr. Similarly sales for the other years i.e. from 2010 to 2013 and for all the companies have been calculated as shown in the annexure.

EXPENSES FORECASTING
To calculate the forecast expenses at first we have calculate the percentage of each and every expenses in terms of sales for the previous five years i.e. from the year 2004 to the year 2008 as shown in the annexure. For example sales & other income of ANDHRA PRADESH for the year 2008 are Rs. 667.31 cr. and raw materials cost is Rs. 339.08 cr. so percentage of raw material in terms of sales is calculated as : (339.08 100) /(667.31) = 50.81 percentage.
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Similarly for JK PAPER MILLS LTD. percentage of raw material in terms of sales has been calculated as : (457.32 100) /(1010.79) = 45.24 percentage. For WEST COAST PAPER MILLS LTD. percentage of raw material in terms of sales has been calculated as : (317.90 100) /(668.35) = 47.56 percentage. Similarly all the expenses have been expressed in the terms of sales for the last 5 years, for the three companies as shown in the annexure. After that I have calculated the average of the percentage for each and every particular. For example percentage of raw material in terms of sale of ANDHRA PRADESH for the year ending 2004 to 2008 is 46.57%, 45.69%, 44.02%, 53.23%, and 50.81% respectively for West Coast. So average percentage is sum of these percentage/5 = (46.57+45.69+44.02+53.23+ 50.81)/5 % = 48.07% And using these percentages in terms of sales I have calculated the forecasted expenses as shown in the annexure.

ASSUMPTIONS
Assumption while preparing forecasted profit and loss account I have kept the depreciation figure increasing proportionately assuming that the firm is charging the depreciation on the basis of straight line method basis and there is proportionate further capital investment in the coming five years. As AP Paper mill has recently invested Rs. 341.21cr in the year 2006-2007 in purchasing fixed assets so there is a need to invest more in near future. Similarly JK Paper Mills has also invested Rs.122.62 cr. in the year 2005-2006. But fixed assets of West Coast was more or less same for the last five years so I have assumed that company is going to make investment of Rs. 50 cr. in the year 2008-2009 from its internal sources i.e. without raising loan. Interest on debt is consider to be same for the coming years as there is no further issue of debenture nor any repayment. Assumed tax rate to be 35%
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FREE CASH FLOW AVAILABLE

From these forecasted profit and loss account I have calculated the free cash flow available to the firm for the coming five years using the formula Earnings Before Interest Tax (1- Tax Rate) (Capital Expenditure Depreciation) (Net Change In Working Capital) If net change in working capital is negative then we have assumed it to be zero, as it was in the case of West Coast for the year 2009. Free cash flow for different companies and for different years has been shown in the annexure. TABLE 6 Particulars CAGR Growth Rate after 2013 Free Cash Flow in 2013 Expected Cash Flow in 2014 WACC Terminal Value A P Paper Mills 8.73% 8.0% 110.13 cr. 118.94 cr. 13.07% 2345.96 cr. J K Paper Mills 8.38% 6% 182.93 cr. 193.91 cr. 16.46% 1853.78 cr. West Coast 3.16% 3% 82.92 cr. 85.41 cr. 14.23% 716.87 cr.

TERMINAL VALUE OF THE COMPANIES

After calculating the expected cash flow from the coming five years I have try to calculate the terminal value in the year 2012 as company is a going concern concept and its not possible to predict the P/L A/C for the entire life of the company. Terminal value is the present value of all the future cash flow expected from a particular asset throughout its life. Formula for calculating the terminal value is Here I have taken the g slightly less than CAGR of sales as computed earlier because in the long run many more new firm will enter into the industry as a result of huge competition firm will be earning only the normal return. Moreover as the firm grew its growth rate stabilizes. Growth rate after 2013 for different companies has been shown in the table 2 above.

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For example terminal value of ANDHRA PRADESH in the year 2013 =Rs. = Rs. 2345.96 cr. Similarly for JK PAPER MILLS LTD. terminal value has been calculated as Rs. = Rs. 1853.78 cr. For WESTCOAST PAPER MILLS LTD. terminal value has been calculated as Rs. = Rs. 716.87 cr.

cr.

cr.

cr.

PRESENT VALUE OF ALL FURURE CASH FLOWS

After getting the terminal value I calculated the present value of all the future cash flow by discounting them with the WACC to know the intrinsic value of entire firm. For example free cash flow available to the firm in the year 2009 is discounted by one year and of 2010 by two year respectively as shown in the annexure. Sum of these present value give us the total value of the firm. For example value of ANDHRA PRADESH =Rs. + + + + + Cr. = Rs. 1591.61 cr.

Similarly value of JK PAPER MILLS LTD. =Rs. + + + + + Cr. = Rs. 1361.11 cr.

Value of WESTCOAST PAPER MILLS LTD. =Rs. + + + + + Cr. = Rs. 591.95 cr.

VALUE OF EQUITY
When the value of a debt is deducted from the above calculated values of a firm we get the value of equity, because value of a firm is the sum of value of equity and value of a debt of a firm.

INTRINSIC VALUE OF SHARE

In order to calculate the intrinsic value of a share I have divided the value of equity with the number of subscribed equity share capital. Value of equity share has been has been shown in the annexure.
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COMPARISON WITH MARKET PRICE

Then this computed intrinsic value is compared with the market price to know whether the particular share is underpriced or overpriced. If intrinsic value is more than the market price the equity share is underpriced and it must be purchased. On the other hand if intrinsic value is less than the market price then its overpriced and prices will probable decreased in the coming future.

CONCLUSION
As per the calculations for the 3 companies shown above in the report I get the following result: Company Name Intrinsic Value (Rs.) Andhra Pradesh Paper Mills Ltd. JK Paper Mills Ltd. West Coast Paper Mills Ltd. Hence we conclude that the stocks of Andhra Paper Mills, JK Paper Mills and West Coast Paper Mills are undervalued and hence they can be considered for investment. Now let us assume that market value of stock of JK Paper Mills is Rs.100. This means that the stock is overvalued because the market value of the stock is more than it should be. At this assumption, there should be no further investment in this company. 81.87 212.43 35.95 67.80 UNDERVALUED UNDERVALUED 450.37 Market Price on 2nd April 2007 (Rs.) 72.80 UNDERVALUED Remarks

LIMITATIONS OF THE VALUATIONS

1. Its subjective & biased. 2. There is no precise valuation, as it is guided by a set of assumptions. 3. We have calculated the intrinsic value of share on 1st April, 2007 due to lack of data such as annual report of company for the year 2008. 4. We have considered the value of g as the CAGR of sales because there were wide variations on both sides in the growth rate of EPS as well as free cash flow.
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SECURITY ANALYSIS APPLYING MICHAEL PORTERS 5 FORCE MODEL

FUNDAMENTAL ANALYSIS
It is an approach to analyzing market behavior that stresses the study of underlying factors of supply and demand. It is done in the belief that such analysis will enable one to profit by being able to anticipate price trends. A Fundamentalist is a market observerand/or participant who relies principally on Supply/demand considerations in price forecasting. Fundamental analysis uses economic, industry and company factors to predict the price of an asset and also estimates the growth of demand for products and economywide changes, changes in government policies etc. The price such estimated is known as intrinsic value or real value of assets. If market value is less than intrinsic value an investor would like to buy that asset as it is going to rise in future. Fundamental analysis is the cornerstone of investment and one should be through with the fundamental analysis of asset before investing into that asset. Whereas, industry analysis involves a comprehensive analysis of the industry and its market segments. This section discusses the key developments that have taken place in the industry. It also identifies and analyzes the driving factors and challenges of the industry. A description of the regulatory structure tells us about the major regulatory bodies, laws and government policies. It can be done through various models like Michael Porter Analysis. SWOT analysis etc.

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MICHAEL PORTER FIVE FORCES ANALYSIS

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A. THREAT OF NEW ENTRANTS

Those industries with high entry barriers will have fewer firms entering. With fewer firms, there is less environmental complexity, and it is easier for the existing firm to dominate the industry. Economic rents are usually higher in such an environment. This makes the industry attractive in terms of investment. The following elements will help to determine the level of threat from new entrants. ECONOMIES OF SCALE If economies of scale exist, it represents a high barrier to entry. Firms within the industry will have to achieve these economies in order to remain in the market for a long time, and if new firm enter, they have to match their scale size. In paper industry, contribution margin ratio (contribution/sales) is very low (industry average) and fixed cost required is high so in order to breakeven (situation where firm is earning zero profit i.e. revenue is equal to cost) high units of production is required, which is difficult (but not impossible) for the new entrant to achieve it in the first year of its operation. Moreover even if they are able to produce the large quantity of goods, will find it difficult to sell the product in the market as the existing firms have the tie-up with the customer. PROPRIETARY PRODUCT DIFFERENCES Some firms have a secret process or secret formula for the manufacture of their product which crates the barrier for the new entrant. But in the paper industry, process of manufacturing paper does not require any secret formula. Moreover there is no patent or copyright over any product, no legal constraint is put by the government in establishing the industry. Government has deli sensed the paper industry i.e. 17th July, 1997. So no hurdles are faced by the new entrant in this respect. ACCESS TO DISTRIBUTION Distribution channel is the path through firms gets their product or service into the market. In the paper industry existing firm have tie up with their distributor according to which distributor are not allowed to market the product of other paper mill. For example Say Trading Company is the distributor of West Coast Paper Mills Ltd. This put pressure in

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the new entrant to break this tie up so they have to set up their own distribution channel which put huge pressure on them. CAPITAL INVESTMENT Higher the capital investment required to establish a firm, higher will be the entry barrier. Paper industry is one of the most capital-intensive industries in the world characterized by a lumpy investment profile. One paper making machine, for example, costs around half a billion dollars. Paper industry is a power water intensive industry which also acts as a barrier to entry. RESISTANCE FROM LOCAL PEOPLE Paper industry is highly polluting sector so the local people opposes the establishment of the factory near their resident. So the new entrants have look up the area far from city for setting their factory. Moreover they have to fulfill the requirement of pollution standard. So in the whole we can say that there is no threat from the new firm in the paper industry as barrier is high.

B. BARGAINING POWER OF SUPPLIERS

If the supplier have bargaining power over the industry in which they supply the product, would make the industry unattractive for the investment. The first step is to determine what paper industry purchases for example pulp, bamboo, chemicals, coal, packaging material etc. The following elements are the key item or items in the industry. SUPPLER CONCENTRATION Supplier is the person from whom the paper industry purchases raw materials to manufacture the paper. If suppliers are concentrated (fewer of them) this could give them power over buyers in industry. Same is the case in paper industry as most of the supplier are in China and can control the supply of raw material to paper industry. AVAILABILITY OF RAW MATERIAL Since the raw materials required in this industry are basically forest product and forest are decreasing day by day. As a result of that raw materials are in crunch so suppliers have high bargaining power.
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PRESENCE OF SUBSTITUTE INPUTS The presence of substitute inputs lowers the power of suppliers. In the paper industry unavailability of substitute inputs increases the power of supplier. IMPORTANCE OF VOLUME TO SUPPLIER If an industry, buy a significant percentage of the total production of the suppliers output then supplier wont have bargaining power as they have no other option. Similarly in the paper industry supplier material are not demanded in other industry as a major raw material. THREAT OF FORWARD INTEGRATION If there is any indication that vertical integration is occurring that is suppliers are coming forward to produce the product in which their product is used as a raw material, then this gives them power. But in the paper industry huge capital investment is required which saves the paper mill from its supplier forward integration. ACCESS TO LABOUR Labor required in the paper industry is basically unskilled which is available in plenty in India so they do not enjoy any power. So considering all the factors we can say that supplier of raw material have the bargaining power but not the labour.

C. BARGAINING POWER OF BUYERS

If the buyers have bargaining power over the industry from which they purchase the product, this would make the industry unattractive for the investment. The following elements are the key item or items in the industry. BUYER CONCENTRATION If buyers are concentrated (fewer in number), then this gives them power. End users of paper are both industrial and individuals. The $10 billion Indian pharmaceutical industry, $8.5 billion Indian consumer products industry sector, and $6.1 billion processed food industry segment, are the major end users of papers for packaging their products. Schools, colleges, offices are also major end users of paper. Book publishing firms, print media and newspaper publishers are other major industrial end users of paper. The
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expanding printing and packaging sectors are the intermediate end users of paper. All these factors put together make the number of buyers relatively larger and hence lowers the buyers bargaining power. BUYER SWITCHING COSTS Buyer switching cost refers to the cost incurred by the customer in replacing the product of one manufacturer with the product of other manufacturer. If the industry has been able to create switching costs, than that would give the industry power over the buyer and makes the industry attractive. In the paper industry, the buyers switching costs are very less as the product are more or less standardize so they enjoy high bargaining power. THREAT OF BACKWARD INTEGRATION Backward integration is the process by which firms acquire their suppliers, or beginning the process of providing for themselves the means to produce the input. This can occur for several reasons, among them: to guarantee a dependable source of the input or to capture the margins normally paid to the suppliers. If there is any indications that buyers are integrating backward then this would gives them power, making the industry unattractive. In the paper industry, there is almost no backward integration among the buyers except in a few cases as for example Rakish Paper Company is a distributor as well as supplier also. PRICE SENSITIVITY Price sensitivity refers to the change in the quantity demanded of a particular product due to change in its price. This deal with elasticity of demand and whether the industry is able to pass cost increases on to the buyer, or have to absorb them. If buyers are not price sensitive, this gives the industry power and makes it attractive. Although buyers are price sensitive but in paper industry since there is a demand supply gap buyers are not able to exercise much power and hence the demand is not really elastic. In fact, the prices are also rising for the past few years. As a result of all this, price sensitivity is also very low. PRICE TO TOTAL PURCHASES Main customer of paper industry spends very less amount of their total purchase in purchasing paper for example individual customer spends around only 0.1% of their expense in purchasing paper.
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Thus, looking at all these factors, we can say that buyers have very low bargaining power in the paper industry.

D. THREAT OF SUBSTITUTE PRODUCTS

An industry will be attractive if there is no threat from substitute products. A substitute is any product or service that will fulfill the same need which the subject industry product fulfills. Higher the availability of substitute product lower will be the attractiveness of the industry. AVAILABILITY OF SUBSTITUTE PRODUCT With the advancement of technology, digital uses and electronic transactions have emerged as a substitute for paper. With the increasing use of computers and other electronic gadgets, paper use has taken a backseat. Moreover, as days progress and as there are advancements in technology, they might emerge as a substitute of paper for individuals as well as for corporate.

E. RIVALRY AMONG THE EXISTING FIRM

An industry characterized by high rivalry is unattractive because it limits the ability to achieve above normal economic rents. At the other extreme, industries with no rivalry are usually dominated by a few major firms which could limit strategic flexibility. INDUSTRY GROWTH RATE If there is a positive trend to industry growth rate, and it is greater than the inflation rate, then firms are able to grow without taking market share from other firms in the industry. This reduces rivalry and makes the industry attractive. Indias per capita consumption of paper is around 7 kg. With the expected increase in literacy rate and growth of the economy, an increase in the per capita consumption of paper is expected. The demand for upstream market of paper products, like, tissue paper, tea bags, filter paper, light weight coated paper, medical grade coated paper, etc., is picking up. Several fiscal incentives have also been provided to the paper industry, particularly to those mills, which are based on non-conventional raw material. As a result of all this, and because of the existing Demand-Supply gap, the Indian paper Industry has also started looking up. Apart
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from this, the paper industry is witnessing a favorable trend in terms of improved realizations since April 2005. The industry has been successful in gradually increasing the prices over the corresponding previous year period. Paper prices have shown a significant rise in both domestic and international markets. EXIT BARRIERS Higher will be the exit barrier higher will be the rivalry among the existing firm. The exit barriers are preset in case of the paper industry because the machines used generally do not have any alternative uses so the stakes are high for scrapping these machinery totally. PRODUCT DIFFERENTIATION Higher the product differentiation lowers the competition. Some high-grade cigarette paper is made from flax. Cotton and linen rags are used in fine-grade papers such as letterhead and resume paper, and for bank notes and security certificates. The rags are usually cuttings and waste from textile and garment mills. So there is ample opportunity for different players to enter into unique segment of products. INTERMITTENT OVERCAPACITY If the industry is running between 80% and 85% capacity utilization, then this is consider as a normal range. Lower utilization means that the industry is susceptible to intermittent overcapacity. This increases rivalry as firms attempt to maintain revenues. If the industry is over the normal range, this indicates that they may lack the capital investments necessary to meet unexpected demand. This reduces rivalry and makes the industry attractive. The industry is already operating overcapacity to overcome the gap in the demand and supply in the market. Recognizing this, several top players have initiated capacity expansion plan that is expected to be start commercial production by 2009.

CONCLUSION
So in the end we can conclude that there is no such competition among the existing firm. Since the price of paper is on the uptrend due to demand supply mismatch we can say that there is no price cut competition, moreover as the growth rate is high so there is no such pressure among the existing firm to capture the market share.
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LIMITATIONS OF THE STUDY

The research work done in this project faced various problems on its way. Several problems like lack of sources to collect primary data, time constraint etc. For making a project covering the capital market, it is very necessary for the researcher to have a good source & authority in the big industries to facilitate the meeting with higher officials and take their views for the project. Another limiting factor is time. It is very necessary for the researcher to think deeply about the purpose of the project and accordingly collect data for project preparation and presentation. We got about one and half month time which is very less for a project to complete properly. Due to time constraint I could not go through the detailed study of the project & also not able to collect more primary data regarding various other companies in the same industry. Data collected from websites for calculation purposes are full of errors and makes it very difficult to get the correct result. The analysis drawn in the project is limited to the selected companies only. There is no effect of this project on the actual picture of the investment decision as share market is very much fluctuating and gets affected because of other sectors also. Exact return on market portfolio cannot be calculated by including the opening and closing balances of NIFTY for year 2008-09 because of the unavailability of the closing figures. There is a lack of updated data relating to the companys financial matters. Valuation of intrinsic value is done on the basis of proposed cash flows of the companies. So it may not be correct way of predicting the valuation of securities.

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FINDINGS OF THE STUDY

A detailed study of the securities and proper analysis of the valuation made various findings in the field of investment sector. Some of these are: The Indian paper industry sector is growing almost double of the world paper industry growth rate which is pulling the economic condition of the said country to achieve a very-very big goal of no poverty. Inspite of proper calculation of the intrinsic value of the securities, it can not be said that based on this analysis, investors can take investment decisions. Because securities market now a days is full of risk. Any factor can influence the market price of the share without having a look over the companys goodwill.

The demand of paper is increasing over the period with a very high speed and will definitely facilitate the Indian economic and infrastructural growth. Calculations made in the study were very difficult. And is therefore not possible for a common citizen to make a analysis of such type. The government is also supporting the paper industry as it totally relicensed the paper companies. As far as project is concerned, it is a very big opportunity to get involved in any project and to utilize the chance of analysing some different practical situations under the supervision of seniors and professors.

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OPINION & SUGGESTION

Massive cross border flow of capital has increased the significance of Security Analysis for decision making purpose before investment. That is the reason behind the topic selection. According to the study it can be opined that it is very necessary for any big investor to make a proper analysis of the company in which they are going to invest. Besides that it can also be said that this type of analysis does not have a very great impact on the investment proposals and market fluctuations. This analysis is limited to valuation according to companys past performance and various assumptions. So it may not be always correct for valuation purpose. After a long research and evaluation it can be suggested that the study has so many limitations and is therefore completely not reliable. It provides an opportunity to draw upon previous experiences and education to apply various techniques of evaluating any firm or industry at large. The following can be suggested : The study is not fully dependable for investment decisions because it is full of limitations and assumptions which may not be there in practical case. Paper industrys growth is good enough to invest in as majority of the stocks are undervalued. The said industry provides employment and need trained employees for development. Government is also facilitating the industry in various ways like taxation, transportation, warehousing, infrastructure, foreign affairs etc, and it should be in a continuous form.

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CONCLUSION
The conclusion of the study can be drawn as the industry is growing proper enough and due to this there is a good opportunity of investing in these companies because the future prospectus of the industry is looking bright. A lot of discussion has already been made regarding objective of the study, organizational overview, various calculations, implication of Porters 5 Force Model, limitations etc which are enough to draw the conclusion. Drawing upon previous experience and education and to apply various techniques of evaluating any firm was the main thing in the study which was completely explained. It is very important to say that the future of India is fully dependent on this types of industries and incremental graph of net worth is very necessary for the industries. As far as the project work is concerned it can be said that this project work played a very important role for practical knowledge of the corporate world. It can also be said that because of this project I got a good knowledge of using MS-OFFICE 2007 which is really very advanced.

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BIBLIOGRAPHY

WEBSITES
www.fotosearch.com www.moneycontrol.com www.answers.com www.businessindia.com www.westcoastpaper.com/company.htm www.andhrapaper.com/html/corporate-profile.htm www.jkorg.in/index.php?option=content&task=view&id=145&Itemid=191&parent=174 www.business.gov.in www.encyclopedia.com www.wikipedia.com www.nseindia.com www.yahoo.finance.com www.google.com www.wiki.answers.com

www.agecon.uwyo.edu/RiskMgt/marketrisk/FundamentalAnalysis.pdf
www.paperex-india.com/paperscene.htm www.economywatch.com/business-and-economy/paper-industry.html www.blonnet.com/2008/05/18/stories/2008051850990200.htm www.bespokeinvest.typepad.com/bespoke/2008/02/global-10-year.html www.nse-india.com/marketinfo/indices/histdata/historicalindices.jsp www.kotaksec.cmlinks.com/Equity/companyprofile.aspx?id=27&code=607 www.tradeholding.net/default.cgi/action/viewtradeleads/tradeleadid/44707/ subject/Inquiry_Demand_of_Paper_Board www.paperonline.org/history/history_frame.html www.investopedia.com/university/dcf/dcf4.asp www.pages.stern.nyu.edu/~adamodar/New_Home_Page/valquestions/termvalapproaches.htm Page 36

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www.secondventure.com/business-valuation-methods.asp www.pmi.org/PDF/pdc_capmhandbook.pdf www.investopedia.com/terms/b/beta.asp www.quickmba.com/finance/terminal-value/ www.en.wikipedia.org/wiki/Porter_5_forces_analysis

NEWSPAPERS
Economic Times www.economictimes.indiatimes.com Business Standard - www.business-standard.com The Telegraph - www.telegraphindia.com The Statesman - www.thestatesman.net The Times of India www.timesofindia.indiatimes.com Hindustan Times - www.hindustantimes.com Business Line - www.thehindubusinessline.com

MAGAZINES
Business World Business Today Competitive Success

BOOKS
CA Institute PCC Cost Accounting And Financial Management Study Material

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