Indian Paper Industry Swot by spo10605


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									 India Equity Report | Company Update |Paper

 Tamil Nadu Newsprint                                               INR 103                   Gateway to Prosperity

 GROWTH – From Paper not just On Paper                               BUY                          Oct 05, 2007

Company Background                                                                               Sachin Gandhi
Tamil Nadu Newsprint & Papers Ltd. (TNPL) was incorporated in 1979. It was            
promoted by Govt. of Tamil Nadu & is engaged in the manufacturing of writing
                                                                                                    Arpit Jain
& printing paper (WPP) and news print. It is the 2nd largest producer of WPP in
southern India & has the largest plant of the country in terms of capacity - at
any single location. TNPL pioneered the concept of bagasse as a raw material
for paper & is currently the largest bagasse based paper producer in the world.
It currently has a capacity of 0.23 mn tpa & exports paper to over 20 countries.
                                                                                    Info Codes
Outlook of the Paper Sector                                                         Reuters                   : TNNP.BO
⇒ Globally the paper industry is influenced by a number of macro-economic           Bloomberg                 : TNNP IN
   factors, comprising economic growth, industrial output, global trade,
                                                                                    NSE                       : TNPL
   consumption, promotion, population, literacy & demand-supply. Estimates
                                                                                    BSE                       : 531426
   peg annual global paper consumption at around 340 mn tpa, which is
   expected to grow to 402 million mn tpa by 2010.
⇒ The Indian Paper Industry ranks 15th in the globe. It is fragmented with          Market Data
   over 600 units with capacity ranging from 3 tpd to 700 tpd. The total            52 Wk Range (INR)         : 120 / 81
   production capacity is 7.58 mn tpa. Actual production is 7.01 mn tpa &           Shares in Issue (mn)      : 70.00
   consumption is 8.06 mn tpa. 10 top players account for 33% of production.        Mkt. Cap (INR bn)        : 7.14
⇒ Per capita paper consumption in India is 7 Kg. compared to the Asian              BSE 2 Wk Avg Volume : 46016
   average of 46 Kg. & the World average of 56.3 Kg. This throws up a
   plethora of opportunities, reflected in the fact that while India accounts for
   nearly 16% of world population, it consumes mere 1% of its paper produce.        Share Holding Pattern (%)
⇒ It comprises of following segments Writing & Printing paper (2.44 mn tpa),        Promoters                : 35.32

   Newsprint (1.48 mn tpa), Specialty papers (0.28 mn tpa) & Industrial paper       MFs, FIs & Banks         : 36.38
   (3.85 mn tpa). The current estimated rate of its growth is 7% well above         FIIs                     :   9.94
   the global average of 2.2%.                                                      Others                   : 18.36
⇒ With boosting GDP, increasing literacy, rise in computerization with India
   becoming one of the ITES hubs & targeted 6% GDP spend on education in            Investment Theme
   India; rise in the standard of living, the current per capita paper
                                                                                    TNPL has identified that in the long term
   consumption of 7 kg is likely to start its journey towards the global average.
                                                                                    the basic problems in the sector would be
⇒ In line with the above the demand for paper and paper products is set to
                                                                                    Raw materials and hence shifted to
   grow at the rate of 9-10% per annum against the compounded average
                                                                                    bagasse. It has also captured the shift in
   growth of 6-7% in the last three years. The growth rate in the next 3 years      the segments from Newsprint to WPP’s. It
   is likely to be 5% in newsprint, 6-7% in non-surface sized paper, 8-9% in        is now targeting the immense market
   surface sized paper, 15% in cut size copier paper & 5% in specialty paper.       boom which would happen due to literacy
⇒ The international Newsprint scenario is promising with a high off-take of         rise, increase in GoI’s education spend,
   print media in the Asia. Domestic scenario is also bullish due to support        rise in lifestyle, and above all automation,
   from consuming sectors as well as government policies & expected to              computerization & ITES BPO’s & KPO’s.
   reach 1.6 mn tpa. However capacity utilizations have peaked & proposed           Ctrl+P - TNPL’s Shortcut Key’s to Growth
   expansions may not keep pace with the demand growth in short term.

⇒ The writing & printing paper segment would immensely benefit with the
                                                                                 Paper Usage Patterns
  Union government enhancing the allocation for education by 31.5% to Rs
  24,115 cr in 2006-07. Increase in government impetus on education,                                                               56.3
  especially in the rural areas, is expected to create a large demand for         40

  paper. The increased outlay for education will drive demand & volumes for       30

  writing paper. Looking at the growth in the Newsprint & Writing paper           20

  segments many of the existing units have shifted focus here.                    10
⇒ Some more factors which would add up to benefit the paper sector are:           0
                                                                                               India          Asia               World
  The targeted rise in Exports which anticipates them to go up to 1.5% of
  global trade, Increased agriculture export which would also benefit the                     Per Capita Paper Usage in kg.
                                                                                               Source: Jaakko Poyry Study
  sector in terms of increased demand for packaging material, similar would
  be the effect of a booming Indian Retail Market & Robust FMCG players.
⇒ Though the overall scenario in the paper industry appears sweet. The           Global Producers & Consumers
  producers here face a lot of barriers; Raw materials shortage, higher          180

  capital outlay & strict environment regulations are perceived to be the most
  important of them. Mills employing cleaner & greener technology would          120           76
                                                                                                                      Produce     Consume
  sustain & smaller ones would be forced to close down with time.
⇒ Cost of Fuel, unavailability of Raw material and Management of Water as a
                                                                                                                         40             30
                                                                                               82       80
                                                                                                                         32             30
  resource turn out to be operating challenges.                                    0

⇒ The Industry is open to competition from the global players. Imports are                    EU       USA              China          Japan

  freely allowed. In the Union Budget 2007-08, the import duty on paper was       Global Producers & Consumers (mn tpa)
  reduced from 12.5% to 10% with effect from 1.3.2007. Import duty on              Source: Center for Paper & Pulp Research

  newsprint is retained at 5%. Countervailing duty is not levied on newsprint
  imports. Paper Mills exported 0.02 mn tn of printing & writing paper during    Indian Paper Industry
  FY 6-07 whereas Imports were 1.1 mn tn including newsprint of 0.8 mn tn.
⇒ Average paper prices are estimated to have risen by around INR 2,500 tpa

  during past years, mainly driven by a cost push (the average price rise of
  wood fibre & chemicals) a tight demand - supply scenario. However, there
  is still a scope of an upward movement of paper prices, owing to a surge in
  pulp prices, which usually sets the trend for paper prices.                          3.85
                                                                                                       News            Spl

Key Highlights of TNPL                                                           Indian Paper Industry Distribution (mn tpa)
⇒ TNPL is the largest producer of eco-friendly bagasse base paper in the           Source: Indian Paper Manufacturers Asso.
  world with an installed capacity of 0.23 mn tpa at Kagithapuram (largest
  plant in India). Its annual use of bagasse is slated to touch 1 mn tpa which   Indian Paper Industry SWOT
  means it indirectly protects around 30,000 acres of forestland every year.
                                                                                  Strength                                    Weakness
⇒ TNPL is an unfolding saga of commitment to sustainable development. It          Growing Market                   Fragmented Industry
  has carefully formulated an Environment policy which keeps future firmly in     Low Costs                                   Price Wars
                                                                                  Develop. Print Indus            Inefficient Operations
  mind. Its commitment to clean production techniques with minimum
                                                                                  In house R & D                       Small Capacities
  pollution load stands out as a bench mark in the industry. However all this
  is done to enhance profitability, at TNPL Recycle to Earn is the key word.
⇒ TNPL has a total pulp capacity of 520 tpd of which 400 tpd is bagasse           Opportunities                               Threats
                                                                                  High Industry Growth            Raw material Scarce
  base & 120 tpd is wood base (10:3). Wood prices are 50% higher than             Many FMCG Players                Lack of Global Stds
  bagasse. This makes it, the most cost efficient company. The company            Ample FDI Allowed              Environmental Norms
  has a unique arrangement with the sugar mills. The sugar companies use          Scope for Plantation            Stretched Paybacks

  bagasse for heating purposes. TNPL gets bagasse from them & in return
  provides them steam, to the extent of the heat equivalence of the bagasse.


⇒ The company has been striving to reduce input costs and in the quest has        TNPL Plants
  been successful in enhancing pulp production over last year by optimizing       TNPL has plant at a single location in
  the mix through usage of different variety pulps for 7th consecutive year.      Kagithapuram Tamil Nadu with a capacity
⇒ TNPL has totally conquered the challenge of power; it has installed a wind      of 0.23 mn tpa
  farm of 35.5 MW and generated 449.3 mn units of power out of which
  105.8 mn units were sold out to the state grid for a profit of INR 5.9 mn. It
                                                                                  Projects for CDM with UNFCCC
  further uses a mix of imported / indigenous coal, lignite & agro waste as
  fuel depending on the availability & economics to generate steam & power.       Large    - Registered          - 35860 CERs

⇒ This FY TNPL again recorded a capacity utilization of over 100%. It has         The crediting period for the CDM project

  initiated a Mill Development Plan (INR 5.7 bn outlay) the Phase1, which is      is Aug 1, 2003 to Jul 31, 2013. Shell

  nearing completion would enhance pulp capacity from 520 tpd to 800 tpd &        Trading International Ltd. is a partner in
  paper capacity from 0.23 mn tpa to 0.25 mn tpa (Elemental Chlorine Free).       the project and credits issued till date are
  In Phase 2, paper capacity would be further enhanced by 0.12 mn tpa.            118083 (worth INR 70.8 mn). The credits
⇒ TNPL swapped the high cost World Bank & other similar loans with US             accrued till date are 29883 (worth INR
  denominated FCNR (B) loan, with reduction in repayment period from 10           17.9 mn).
  yrs to 5 yrs, a saving of INR 0.3 bn & average cost of loan down to 6.55%.      Small    -     Registered      - 14431 CERs
⇒ TNPL has prudently reaped the benefit of its plant technology, which            The crediting period for the CDM project
  allows it to switch conveniently from newsprint to WPP and vice-versa. It       is Apr 1, 2004 to Mar 31, 2014. There is
  currently produces 99% WPP which is economical & has high realization.          no partner in the project and TNPL can
⇒ By innovation, TNPL has installed a bio-methanation plant from bagasse          sell out all CERs. Credits requested till
  wash water which generates methane for supplementing Furnace Oil.               date are 45585 (worth INR 27.4 mn).
⇒ TNPL has secured its pulpwood requirements with a long term agreement
  with Tamil Nadu Forest Plantation Corporation. It has also employed
  various captive plantation & social forestry schemes for the purpose.           TNPL Products
⇒ Water management has also been skillfully planned by TNPL. It has built         Business Stationery
  in-house reservoirs and decreased the water requirement per tonne to one            1.       TNPL Copier
  of the industry’s lowest, further the waste water is treated and irrigates          2.       TNPL Copy Bright
  barren 1500 acres of sugarcane, eucalyptus etc. around the factory.                 3.       OS 2000
⇒ TNPL is also planning to start a mini cement plant of capacity 400 tpd with     Classical Stationery
  the lime sludge and fly ash generated during the paper production.                  1.       Creamwove
⇒ TNPL is in possession of vacant land, centrally located in the Industrial           2.       Classic Writing
  Estate at Ambattur, this would be used for constructing an I.T. Park.           Computer Stationery
⇒ WWF has authorized TNPL to use its Panda logo on TNPLs products                     1.       Popular Grade Papers
  which would help TNPL in branding its export quality wood free paper                2.       Premium Grade Papers
  exports, which account to 23% of its sales volume.                                  3.       Wide GSM papers
Key Financials                                                                        4.       Ready to use papers
                                                                                  Premium Stationery
 Year Ended 31st                            Mar 05        Mar 06        Mar 07
                                                                                      1.       Ultra White Maplitho
 Revenue (INR mn)                           7055.9        8471.3        9064.3
 Rev. growth (%)                              15.68        20.06          7.00        2.       Excel Maplitho
 EBITDA (INR mn)                            1245.4        1991.6        2134.5    Printing Stationery
 Net profit (INR mn)                          379.5        805.5         860.6        1.       Hi-tech Maplitho
 Shares outstanding (mn)                         70           70            70        2.       Super Printing
 EPS (INR)                                      5.4         11.5          12.3        3.       TNPL Offset Printing Paper
 EPS growth (%)                             (28.12)       112.25          6.84        4.       TNPL Maplitho
 P/E (x)                                       10.8         10.1           6.8
 EV/ EBITDA                                    34.9         42.4          29.8
                                                                                      1. Different Grades
 ROCE (%)                                       8.1         17.5          16.1

Financial Statements
              Income Statement                                                                   (INR mn)
               Year ended 31st                    Mar 05        Mar 06      % Chg      Mar 07    % Chg
               Total Sales + Excise               7405.7        8905.6        20.25    9587.8       7.66
               Other Income                         194.5        301.2        54.86     132.9    (55.88)
               Change in Stocks                   (141.0)        (40.6)     (71.21)     (33.3)   (17.98)
               Raw Material Con.                  2447.8        2774.8        13.36    2902.8       4.61
               Employee Exp.                        531.7        516.1       (2.93)     637.1      23.45
               Excise                               544.3        735.5        35.13     656.4    (10.75)
               Other Exp.                            2690       3148.2        17.03    3356.6       6.62
               Operating Exp.                     6354.8        7215.2        13.54    7586.2       5.14
               Operating Profit                   1050.9        1690.4        60.85    2001.6      18.41
               Total Interest                       162.0        186.5        15.12     205.2      10.03
               Gross Profit                       1083.4        1805.1        66.61    1929.3       6.88
               Net Dep.                             617.1        625.0         1.28     667.4       6.78
               Total Taxation                         86.8       374.6      331.57      401.3       7.13
               Net Profit/Loss                      379.5        805.5      112.25      860.6       6.84

              Four Years Balance Sheet                                                           (INR mn)
                    Balance Sheet as on 31                   Mar 04       Mar 05      Mar 06      Mar 07
                           SOURCES OF FUNDS                  7032.3       7151.7      8306.5     11359.0
               Equity Share capital                            693.6        693.6       693.8      693.8
               Share Application Money                           0.0          0.0         0.0        0.0
               Preference Share Capital                          0.0          0.0         0.0        0.0
               Reserves & Surplus                             3798.8       3960.7      4531.4     5071.2
               Loan Funds                                     2055.2       1579.5      2242.9     4958.6
               Unsecured Loans                                 484.7        917.9       838.4      635.4
                                 USES OF FUNDS                7032.3       7151.7      8306.5    11359.0
               Gross Block                                   13629.3      13810.8     14300.5    15120.8
               Less : Revaluation Reserves                       0.0          0.0         0.0        0.0
               Less : Accumulated Depreciation                6122.6       6637.6      7279.3     7937.8
               Net Block                                      7506.7       7173.2      7021.2     7183.0
               Capital Work in Progress                         96.9        108.1      1151.3     4595.2
               Investments                                      81.4         11.4        11.4       11.4
               Net Current assets
               Current Assets                                3157.8       3918.0       3699.6    3765.8
               Less : Current Liabilities                    3816.1       4065.9       3581.0    4198.3
               Total Net Current Assets                      (658.3)      (147.9)       118.6    (432.5)
               Misc. Expenses not written                        5.6          6.9         4.0        1.9
               Bk Val Unquoted Investments                      70.0          0.0         0.0        0.0
               Mkt Val. Quoted Investments                       8.3         13.0        11.2       11.1
               Contingent Liabilities                          597.3       1509.7      4835.3     1337.2
               Dividend (%)                                     27.5         27.5          30         40


       Quarterly Income Sheet                                                                    (INR mn)
         Quarter ended                     Sep 06            Dec 06             Mar 07            Jun 07
        Income from Operation              2354.5            2144.5             2256.2            2140.1
        Cost Of Operation                  1861.1            1706.5             1733.8            1615.3
        Operating Profit                    493.4             438.0              522.4             524.8
        Recurring Income                     58.1              75.9                77.8             51.0
        Adjusted PBDIT                      551.5             513.9              600.2             575.8
        Financial Expenses                   56.0              41.1                54.9             51.2
        Depreciation                        160.9             162.2              186.2             171.3
        Other Write Offs                      0.0               0.0                 0.0              0.0
        Adjusted PBT                        334.6             310.6              359.1             353.3
        Tax Charges                         103.4             105.1              111.6             116.0
        Adjusted PAT                        231.2             205.5              247.5             237.3
        Non Recurring Items                   1.1              17.5              (30.3)              0.0
        Other Non Cash Adjust                 0.0               0.0                 0.0              0.0
        Net Profit                          232.3             223.0              217.2             237.3

       52 Wk – Index Relative Percentage Appreciation

                                                TNPL with Sensex
       Risks Associated
       Like any other industry even the paper sector is susceptible to a variety of factors. Raw material
       scarcity is one of the main factors, because the industry depends upon wood pulp as a basic raw
       material which heavily fluctuates both in cost and supply. A change in Environmental Norms can
       increase volatility in the sector. Low operating efficiency and longer paybacks of capital employed
       are again two factors which gain importance due to the price susceptible nature of the market.
       Rising competition due to Chinese and Indonesian counterparts, which operate at cheaper
       resources, poses as a threat too. However as far as global history demonstrates the Indian paper
       industry as a whole would definitely grow at a rate of 1:1 with GDP.

       In a Nutshell
       Knowing the sector and being Socio-centric would benefit TNPL in the long run. This is the only
       reason it shifted its technologies from the conventional wood pulp base paper to the bagasse
       based eco-friendly one. It has also taken good care of the operating inefficiencies in the sector &
       independently arranged for fuel & power. Looking at the capacity utilizations it has over past few
       years and the fact that it has been a zero stock company at year endings for the last 16 years
       year which is a record in itself, it has decided to expand at the right moment. It has over the years
       used every resource judiciously & recycled or procured resources from alternate sources which
       are the main reasons for TNPL being the company with the lowest operating costs in the sector. It
       has not let away many chances of enhancing revenue streams & cutting costs.


Indira Group Offices
Registered Office                      : Singh House, 3rd Floor, 23/25 Ambalal Doshi Marg, Fort, Mumbai 400023
                                           Tel : +91-22-22656812 Fax : +91-22-22656985                             Email :
Administrative Office                  : Ramavat House, E-15 Saket Nagar, Indore 452018
                                           Tel : +91-731-2566361 Fax : +91-731-2562117                             Email :
Institutional Dealing Unit : Africa House, 3rd Floor, 5 Topiwala Lane, Lamington Road, Mumbai 400007
                                           Tel : +91-22-30080675 Fax : +91-22-23870767                             Email :

Rating Interpretation
Buy        : Expected to appreciate more than 20% over 12-months                                                   Reduce : Expected to depreciate up to 10% over 12-months
Accumulate : Expected to appreciate up to 20% over 12-months                                                       Sell       : Expected to depreciate more than 10% over 12-months
Trade Buy : Expected to appreciate more than 10% over 45-days                                                      Trade Sell : Expected to depreciate more than 10% over 45-days

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