Stock buzz: Tamil Nadu Newsprint could see strong rally in coming days

Tamil Nadu Newsprint has always been a deep value stock; it has been a deep value stock from last three years. But why is this deep value stock making a comeback? Well the trigger in the market is that, in next two quarters, which is this quarter and next, TNPL could report a fantastic uptick in operating profit margins.

Why will operating profit margins for TNPL go up? Number one, operating capacity has gone up and will go up because of latent demand. Secondly, bulk of the capex for TNPL is over which means cash flow and cash flow management will improve. Furthermore, TNPL for the first time now, will be producing surplus pulp, which means their dependence on imported pulp will reduce and they are in a capacity now to monetise the entire local pulp business as well.

My understanding is that a lot of HNI investors are also accumulating the stock and even though it is a midcap stock, FII ownership in TNPL has gone up from 3% to about 6%. Volumes could be a challenge, but the stock is not a very far away from a 52-week high. So valuation comfort, strong dividend yield, scope of margin expansion and to top it all, institutional activities being very strong would work for the stock. Net-net, another 15% to 20% is there on the table. TNPL is also a typical cyclical stock and at a time when the appetite for cyclicals is making a comeback, I expect that TNPL could be in for some strong trading days.