Les Mills Core Forus

[Imogen Petrusky]

Itrecycles waste paper into various grades of kraft paper and sells it to local vendors who in turn convert them into customised boxes for various companies. Annual capacity of paper mill is 60,000 tons.

SIPL also has its box manufacturing facility near the paper mill which consumes 50% of its paper output to make boxes. Capacity of box manufacturing plant is 30,000 tons/annum.

I will not write much about paper industry as it is very well covered in various threads of paper companies in the forum. Below are a few points which interested me and I have tried to cover them in AGM notes:

1.Mr.Manish Patel, MD of the company is very dynamic and technocraft. The feedback I got from scuttlebutt was that the MD knows about the minute details of each and every machine installed in the company and takes care of them regularly. MD himself works on repair/installation of new machine.(Total promoter holding is 43.2%.Well known investor Anil kumar Goel holds 6%)

2.With ban on plastic by regulatory agencies, as an alternative I believe the demand for kraft paper and packaging will continue to grow by FMCG/E-commerce. Recent presentation from Ruchira paper ltd estimates demand for packaging paper and board at 9.7Mn tons in FY19.

I have attended the AGM of SIPL where I could spend a few hrs with MD. Below is the notes I prepared which gives an idea about the present scenario of the paper industry, influence of China factors on it and SIPL business aspects, expansion & future plans. (!There may be a few mistakes from my side while noting down the points)

Q.Update on China ban on importing waste paper for recycling.How does it benefit the Indian paper mills/our company?

China govt has banned import of waste paper except a few higher grades and they are very strict with their policy(they are allowing import of fresh pulp). This has resulted in significant reduction of the cost of waste paper being used for recycling which has greatly benefitted Indian paper mills importing waste paper. Bearing the transportation charges is all that is required to import some of the lower grade waste paper. This has good demand from Indian mills which are importing and converting into paper. After converting, paper is sold either in the domestic market or exported to China. Presently all the mills having good time with China absorbing the output easily. Chinese are in turn using them as raw material /converting these paper into boxes and selling them.(Indian mills importing certain low grade material for 90$ and selling at 380 $ after processing). This trend is seen since last 5 months.

Supply of paper for domestic use has reduced due to better prices with export. Demand for kraft paper by local mills is very high presently due to low availability and increasing demand by end user. We are both selling our kraft paper to local box manufacturers and exporting.

Q.Who are your major customers? how is the business doing?

ITC: Our relation was a bit rough with them initially but of late they are preferring our products due to cost saving and quality.

Nestle: around 230 tons

Asian paints: new plant is starting soon(October) near our factory. We have been working with them from the beginning. We are going to get around 200 tons of business from them once they start production.

GSK and Reckitt benckiser (200 tons) have increased volumes with us.

Others like United breweries (not in constant business with us), few other alcoholic manufactures.( I have noticed a lot of other company boxes manufactured by SIPL during my scuttlebutt)

Q.Update on labour strike/issues affecting our production/agreement with labour union

Actually everything was in place for agreement but few people have spoiled and went on strike. To some extent issue was prolonged by karnataka elections. After a few months, we could come to agreement with slightly higher salary revision than our expectation which is loss for company. But we are to bring certain changes in recruitment of people and time duration of agreement.

Q.Govt has initiated anti dumping duty on paper. Can you give more insights into it? How does it affect SIPL:

The particular Anti-Dumping duty proposed is on writing and printing paper not on our raw material. We are not going to be affected by it. To prove that the actual dumping is happening, will take 1-2 yrs. Asian countries comes under free trade agreement and putting normal duty is not possible. Certain countries ( Taiwan company)used to sell their Kraft paper at low price in India. We also purchased small quantity from them in the past to try their material but realised their quality is low to make boxes and not suitable for us.

Q.Outline your capacity expansion plan? Why did we decide to go for paper capacity expansion rather than boxes?funding and additional revenue possibility?

Capacity expansion was delayed from our end, else we would have enjoyed really rosy now. To some extent it is affected by labour strike.

It is important to have good paper manufacturing capacity before starting box division. Before capacity expansion we need to think about how sure about selling / how much and how sure about collecting money. right capability right people.We have excellent team.Technically we are good and we also understand the market

Our new paper capacity expansion is for 350 tons/day but the net addition will be 230 tons/day as existing two line PM1and PM5 with capacity of 85 tons will not be used due to certain issues. The planned expansion is to produce paper in the upper band of segment ie 24BF and above(less than 24BF is common grade produced by everyone)

The capacity expansion will take 1.5 yrs and we will be able to use full capacity in 6 months. With full capacity at present prices our revenue will be doubled to around 450-500Cr

We did lot of search before finalising the machine. Myself went to Europe to finalise it. The core part of machine will be imported from Europe and non critical hardware will be from China. Nobody in India has this particular machine.Its more accurate,technically superior,fast,gives better quality of paper and effective utilisation of power. With increasing capacity we have shift to continuous process rather than present batch process.

Total cost of expansion will be 125 cr+GST.60 cr from internal accrual and remaining 90 cr from debt.Will be having debt once work is done with of interest of 8 cr /Yr

We will plan for box manufacturing capacity somewhere near Pune region or Chennai or acquire some facility but all this is long term not now. Presently we are focused on paper capacity expansion.

Q.What other products are possible from us in future?

With govt banning plastic bags, the paper bags demand is on rise. Technically we can but need to have new line to manufacture paper bags.

Other possible product is to make material for false roofing what is called as gypsum board. It has paper in the middle hardened by calcium phosphate and some other chemical material. With the present machines we can manufacture it but having technical difficulty in contraction process. New machine will solve this problem as well. Presently this material is imported to India .

Land : we have been purchasing land keeping future expansion in mind near the existing factory. It also gives us right to use water from nearby reservoir.

Hi,

Most of the companies operating in various segments of paper industry presently trading at around 10 PE or less (International paper ltd at 15PE). I am not sure how market is going to value this cyclical sector if they continue to show consistent earning growth for next 1-2years. Ruchira,International paper,SIPL,Seshasayee,NR Agarwal have posted good Q2 nos.Results of JK/west coast are still to be announced. I am optimistic that for next two years these companies will continue to post better results unless China changes its policy or when excess capacity comes online.

SIPL is currently trading at around Rs.100 with EPS of Rs.12-13 for FY19 with near complete utilisation of capacity.SIPL topline may not grow much for next FY unless they run extra shift to increase the production but seems like they will take price hikes.

There may be better methods to valuate which I am not aware.Hope seniors in the forum will answer it better.

3a8082e126