Pulp prices have already come down from $800 to $650 per tonne. Inspite of this, paper prices for uncoated paper (copier paper) have been steady vs last year. The key reason is the govt starting Jan 2019 has put a duty on uncoated paper at $855 per tonne for 3 years which when converted to Rs comes to Rs 60/kg. This is higher than average realisation for FY19.
Companies which have a higher share of packaging board will benefit from lower global pulp prices as they import 33% of their RM requirement (special grade) for packaging board segment.
All this negative news w.r.t. fall in global pulp prices has already been accounted in valuations with these shares trading at 5-6 PE. I feel let alone growth, consistency should lead to re-rating for these companies (10 PE)
As per the P&L statement, there is significant reduction in inventories/WIP which has led to lower expenses and higher profits. Is there any particular reason behind this?
I understand what you mean
Reduction in inventory happens when you sell more or produce less. How can one give a reason for it?
Usually in a manufacturing company there are 2 ways to arrive at a profit
Revenue (sale price as per sales invoices)
(less) cost of producing each item by finding out how much was used for each item in the products sold
Most companies will find that extremely difficult to calculate so they use a different method
Revenue (sale price as per sales invoices)
(less) cost of all raw material bought
(add) raw material (finished and work in progress) in hand and not sold
Both ways are correct but the second method is much faster and more accurate
There have been instances of companies cheating, the famous one being American Express being cheated on the oil inventory before warren buffet bought Amex
What they do is show a higher raw material in hand than what is actual. Auditors go to great lengths to identify that the raw material at hand is accurate so now a days its not easy to cheat.
I dont imply JK Paper has cheated in any way, but giving you a background I thought would help
A bit more clarification might be easy with an example
Lets say there is a company that makes calculators. Say its a new company. They forecast sales of 1 million units
So they buy 1 million lcds, 1 million circuit boards and 1 million set of keys and moulded enclosure.
Price per unit is
lcd = rs 1
circuit board = rs 0.50
enclosure = rs 0.10
Lets say they sell half million units
Their cost hence will be
lcd, rs 1 x 500k
circuit board, rs 0.50 x 500k
enclosure, rs 0.10 x 500k
however another way of calculating the cost is as follows:
take cost of all lcd, rs 1 x 1m
cost of all circuit board, rs 0.50 x 1m
cost of all enclosure, rs 0.10 x 1m
(less) inventory ( rs 1 x 500k, rs 0.50 x 500k, rs 0.10 x 500k)
Total in both is same however its much easier to count inventory when you have a mix of products and if your raw materials are things like abs/plastic where it is difficult to determine exactly how much was used to make a mould. Also if records are kept, then inventory is something that is already measured in the companies erp as the company has to keep an eye on when its getting used up.
Using the second method does not put additional man hours
Thanks for the explanation. But if we take the recent qtr result we are seeing a Change in Inventory to the tune of -112 Cr which is quite significant. So what does this Negative Inventory really mean?
Are we stating that 112Cr of Inventory is available and was not sold in the current qtr. Can you kindly help explain this better.
Also last qtr the Change Inventory was +48 Cr , what does this mean . Apologies for asking some basic question but this has always puzzled me
Thanks a lot on detailed reply. So to conclude and verify if my understanding is right. The reason is:
They anticipated higher demand in the past but weren’t able to sell leading to build up in inventory. They sold that inventory now by producing less. They are not building inventory as they are expecting less demand?
Under IAS usually the companies have to make sure that the balance sheet shows accurate position at the date of financials.
Any increases/decreases in assets or liabilities have to be passed in the profit and loss account.
Lets say the company uses counting closing inventory as a form of control. However the company still needs to calculate the cost of their products. In my example lets say the company moulds its own calculator keys and enclosures and assumes they need 50 grams of abs for moulding including slight wastage.
Each time the production house is given 5 kg of abs, one part of ledger makes note of how much is sent out
Each time a calculator is sold, one part of the ledger takes the revenue and average cost of the calculator
Lets say that we hired an extremely efficient labour and there were not wastages, so they could mould the enclosures for only 30 grams
Now when you count the abs, you will realise you made more profits
Because this is a constant exercise usually at the balance sheet date you can have a plus or minus
A big minus as in the last financials usually means there is inventory build up. It probably also makes sense as we have had a new plant and lower sales so I would assume we have some build up of inventory.
A look at balance sheet usually will make it more clear.
I think they have build up a bit of inventory as sales are less although margins are higher. After the new plant going live for 2 months out of three in the last quarter, we should have had higher revenue
If they can move this inventory in the next quarter, next quarter results could be much higher. (if they can move) However now they have stock and if there is demand and with the recent anti dumping etc I reckon they should be able to shift significantly higher inventory to revenue
Thanks for the reply. I got that they have a build up in inventory because of slow demand. But this keeps me thinking why margins have improved if the sales are low.
The only explanation is: They have taken the benefit of lower raw materials in finished goods in Q1 while they put the higher cost finished goods as inventory. This means the margins should go down in Q2 as they convert this inventory to sales.
Did some further research on Changes in Inventory and got a different understanding. Pls correct if this seems wrong.
Since these are Quarter results we are talking about Inventory Change and not the actual Inventory. Here a negative number will increase the cost of goods sold and hence reduces income for period reporting period.
Inventory change is the difference of value between last reported financials and current financials (quarterly or yearly). If the current period inventory is lower than last period inventory we have a negative change and number accordingly.
One of the way calculating Cost of goods sold is adjust the cost of goods purchased or manufactured with changes in inventory. If the change in inventory is positive it means there is unsold item lying and reduced from cost of goods sold. For negative change in inventory it will be reverse that means sold more than previous period and hence added to cost of goods sold.
If Actual Inventory is 100 and change in inventory is say positive 10 then cost of goods sold is 90.
If Actual Inventory is 100 and change in inventory is say negative 10 then cost of goods sold is 110.
So as per AR 2019 - If I am not wrong then Total Inventory on CA was 322 Cr and with this change the net Inventory (of -112 cr) after Q1 2019 will be 322 - 112 = 210 Cr .
Typically the Closing Inventory has always been 300+ Cr over the last 5 years.
I can interpret two things : Management has either turned efficient and improved in Inventory Management or the Company has delivered the best Margins already for this year in Q1 and the Margins may go down in the coming quarters in order to build up the needed Inventory for future sales
I am tending towards the later conclusion more than earlier one. Also other thing to note here is Ebidta Margins over last quarter : 34.5%, 27.1%, 28.5%, 26.1%, 25.1%
This also points to one time exceptional performance of Margins than a sustained one.
But if they can pick up sales then ofcourse the impact could be smoothened due a larger base.
I understand what you are saying however by change of inventory they mean change of inventory on balance sheet not on the profit and loss account
On the profit and loss account, the change of inventory has been a negative amount thus on the balance sheet it has to be a positive amount. In accounting terms,
Credit - closing stock (profit & loss account)
Debit - closing stock (balance sheet account)
Hence if you were to look at the balance sheet (not published in this quarter), inventory would have risen.
Your explanation you copied is correct but you need to look at balance sheet figure not the profit and loss figure.
Just went through Interview again posted earlier in this post.
Realized that input cost for lumber etc have come down drastically from $800 to $550 that is a significant reduction and hence one more interpretation can also be that same level of inventory can be maintained at a much lower cost. Hence this will also reflect as Negative Inventory Change since the value is reflected in amount (INR)
In case they can maintain the volumes or even grow slightly then this could be another good year. As per the interview the current prices are up 6%- 7% from last year and down 1% from last qtr.
I think their paper is considered premium paper. They have more capacity after sirpur acquisition which has gone live however the volume on that is not reflecting in the last quarter p&l.
When a plant goes live there are usually initial teething problems as well
They will be able to shift a lot of volume this quarter
Hello All, Ashish Chopra (can share mail id with moderator) is preparing these notes and waiting on approval to join the forum. Is there anyone who can help accelerate his membership.
