There are some red flags like drawing maximum salary etc.The main issue is till when will the profitability last?
They are paying 7 percent dividend rate as of 2019 and seemed committed to the biz.
Disclosure:
Not invested.
Yes, itās deep value even considering commodity and cyclical nature of business. Growth is a concern (like for most paper companies) but here the play is to return to ānormalā valuation. All they need to do is run the day to day day business decently.
Seshasayee papers looks more interesting .But the main issue for these paper companies what will be the profitability when commodity prices are unfavourable.Will they still be attractive in terms of p/e,then?
The apparent undervaluation of this business in this carnage is astonishing!
Market cap of the company is 82 cr, Debt to Equity 0.2, and Price to Book value is 0.4
All this while company has Net current Asset of 64 cr.
Average Operating CF of last 5 years is 37 cr
and depreciation of last 3 years is around 8 to 9 crs
promoter buying from market is also a positive
is it one of those cases where you donāt have to open excel to make a decision? I understand that paper is commodity which is one factor to keep in mind with all this.
PS the plant of company is shut because of outbreak but thats the case with most of the businesses right now.
No investment yet, exploring
The Co. came out with very decent set of Q4 numbers, though at first glance they appear to be bad. They are in fact much better than Q3. There is a M to M loss of 9.29 crs on investments due to a sudden fall in the equity markets. Please refer to note No. 6
why is capital work in progress is 42 crores? Is the company going through any expansion?
Hi everyone. Just did a quick āannual reviewā of Shreyans Industries as Iām holding the stock since around late 2019. Most of the information Iāve included here is from that time and may be slightly outdated. I have more updated numbers in my excel (which includes my valuation exercise) which you guys can request me on DM.
I am just copy pasting my analysis below. DM me for the pdf if you want it with better formatting. Please note that this isnāt an investment recommendation and I do hold shares in the company.
Shreyans Industries
Company Profile
Shreyans Industries is engaged in the manufacturing of Writing and Printing Paper (35% of domestic paper market) with a capacity of 94,000 metric tons (MTs) per annum from its two plants: Shreyans Industries and Shree Rishabh Paper (individual capacities are unclear). The plants are located in Punjab which generally has water supply issues which could affect the input (pulp from trees) prices of locally sourced raw materials. The key raw material for the product is pulp which tends to have an adverse impact on margins. However the Company uses agro residues, viz. wheat straw, sarkanda as the primary raw materials. The Company caters to both domestic (95%) and international market (5%).
Per capita consumption of paper in India stands at a little over 13 Kgs. which is well below the World average of 57 Kgs. India remains the fastest growing market for paper globally and has grown from 9.3 million tones in FY08 to 17.1 million tones in FY18 witnessing a CAGR of 6.3%. The demand for Writing and Printing Paper in India is expected to grow on account of rapidly improving literacy rates and increasing office documentation needs.
Paper industry in India witnessed improved performance which is attributable to better realizations driven by high input cost. International pulp prices, key raw material continued to inch up till September end pushing up the paper prices. China, the largest importer of waste paper globally, announced a ban on certain grades of waste paper in July last year which came into force in January 2018. The move led to increased demand for pulp pushing up the global pulp prices. However, pulp prices have softened during last couple of months, which in turn has affected paper prices also.
Financial Snapshot ā 03/11/2023 vs. 02/21/2022 vs. 01/09/2019
MARKET CAP (RS CR) 212 150 168.38
P/E 4.39 7.94 3.51
BOOK VALUE (RS) ~168 ~223 143.39
INDUSTRY P/E 13.59 15.11 6.62
EPS (TTM) 35.05 13.68 34.73
P/C 63.0 (20.2) 2.93
PRICE/BOOK 0.92 0.67 0.85
DIV YIELD.(%) 1.30% 2.76% 4.11%
Source: Moneycontrol/Screener
Cost of Goods Sold Breakup
Wood Pulp makes up only 15% of the COGS which is a positive as pulp prices tend to fluctuate a lot and generally makes up a large part of raw material expenses. This also suggests why the Gross Profit Margin could be quite substantial at 53.2% also ahead of Seshasayeeās 47.2%.
ARC: Gross Margin has remained fairly stable despite the pandemic, most likely due to the reduction in proportion of Wood Pulp and Caustic Lye and increase in proportion of Straws and Grasses.
SWOT Analysis
Strengths
- Agro based mill which uses straw and other cheap recyclable products to manufacture paper which provides it with superior gross margins
- One of the most efficient and technologically driven manufacturers of paper
- Has recently benefitted from the installation of shoe press, the addition of the state-of-the-art head box, and changing the drive system where it could speed up the machine by almost 20 percent
- Has strong ROE of 23.68% (3-yr avg of 21.3%) and ROCE of 30.55% (3-yr avg of 19.6%)
- ARC: Current ROE and ROCE have dropped down to 4% and 5%
- Managed to remain profitable and operating cash flow positive despite the shutdown in business
- However only managed profitability due to Other Income from investments
Weaknesses
- Situated in a ādark zoneā which means that access to water can be a big issue
- Currently operating at 95% capacity with limited scope for expansion
- Any growth is going to be from margin expansion or inorganic growth, the latter of which the Company has done in the past
- Business requires a lot of capital investment to generate incremental revenue
- High Operating Leverage has caused the Company to be negatively impacted despite steady Gross margins
Opportunities
- Demand will continue to come from local markets as Indiaās per capita consumption of paper in India stands at a little over 13 Kgs which is well below the World average of 57 Kgs and has grown at a CAGR of 6.3% over the last 10 years
- Drivers include rapidly improving literacy rates and increasing office documentation needs
Threats
- Higher input prices in terms of pulp and procurement of water
- Higher imports from China and relaxation of environmental norms in the industry there
- Environmental issues for the operations of the plant
- Possibility of peak already being achieved in terms of margins and capacity utilizations
Porterās 5 Forces (3 out of 10)
Threat of new entrants ā Low
- Highly capital intensive business with large machines, land and capacity required to start manufacturing
- Market presence and loyalty also seems to be valuable in the industry
- Lot of regulatory and raw material challenges make it unattractive
- Not a lot of scope for greenfield projects
- Low growth market provides limited attraction
Threat of substitutes ā High
Product was well substituted during the pandemic, albeit substitution seems to be temporary to some respect
Bargaining power of Suppliers ā High
Raw materials for paper are low in its proportion of expenses but these can rise and erode margins heavily
- Domestic suppliers are not able to meet the demand of these paper mills and nearly half of the raw material for writing paper is imported
- Large impact on margins due to volatility of input prices
Bargaining power of Buyers ā Medium
Buyers are not powerful as demand tends to exceed supply
- Only institutional buyers might have some bargaining power
- Product is still quite like a commodity
Rivalry amongst competitors - High
- Competition occurs in terms of quality of paper, technological efficiency and capacities as brownfield expansion occurring regularly by big players
- Industry is also dominated by both pure-play (JK Paper) and conglomerate companies (ITC)
Management Review
Shreyans Industries is a family run business with Rajneesh Oswal as the Chairman and MD and Vishal Oswal as VC and MD. Anil Kumar is the CEO of the Company. The Company has been growing under the leadership of Anil Kumar who has a strong emphasis on technological progress and strong client relationships. Management has continued to improve its manufacturing technology and drive productivity through innovation rather than expansion.
Performance wise the company has maintained excellent ratios for the given industry, providing ROE at 32.75% and ROCE at 30.46%. The company has also maintained very stable earnings in a highly volatile industry and has clocked a record EBIT margin of 11%. For this performance the management draws the following remuneration:
Low debt along with limited risk taking makes the management dependable. Dividends are also disbursed consistently at 14.72% payout ratio which brings the Dividend Yield at a price of Rs.118, to 4.24% (Includes special dividend of Rs.30 in addition to normal dividend of Rs.20).
Valuation ā Current Price of Rs.154
| Perpetuity Method | ā¹ |
|---|---|
| Enterprise Value | 182.9 |
| (-) Debt | -58.5 |
| (+) Cash | 117.7 |
| Equity Value | 242.1 |
| Estimated Value per Share | 175.2 |
| EV/EBITDA Method | ā¹ |
| Enterprise Value | 392.4 |
| (-) Debt | -58.5 |
| (+) Cash | 117.7 |
| Equity Value | 451.6 |
| Estimated Value per Share | 326.8 |
2 Likes