Kalpesh's Portfolio

Paper industry consumes lots of power,
for same number of units power purchased from outside would be at Rs. 8-9, with internal production it costs just Rs.2-3/unit.
Thats huge saving for satia, it alone has increased OPM by 8-10%.

Yes its very tightly held stock, may be by friends and family.
It’s a good indication that other local entities belief in promotors & growth story.


Thanks for sharing your notes on Satia Industries. Encouraged by your rationale and follow-up comments from @vikas_sinha, I spent some time reading about the business.

2 Q (still looking for answer and thought of checking with you):

  1. What’s the basis for the opinion available at discount to intrinsic valuation? Business Characteristics that I noticed: Cyclical, B2B, High dependence of sales on State education board (~50%), No Pricing power- Absolutely driven by market forces.
  2. What’s the plan to sell the additional capacity? 3rd paper machine was installed in FY98, but sales/NP improved from FY 2017 onwards.

Few not so +ve observations to balance the discussion on the idea:

  • 20% of employee expenses went to the CMD and his son (FY-20); Next best man (joint MD) was paid only 11% of CMD’s paycheck.
  • Limited opportunity size, seeing MCap of other players in the sector.
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Satia Industries
Key risks -
1. Availability of RAW material
Company practices to secure enough raw material for existing plants, and its available abundantly around the location of factory.
However, new plant will use raw material as wood chips, they have 540 acre of planted land but I’m not sure it will be able to fulfill entire requirement, but looking at track record of management, I’m not much concerned.

2. Imports - The reason for high growth in import is attributable to its superior quality and lower price.
Imports are threat to high cost manufacturers, as Satia is highly backward integrated and one of the lowest cost producer in country, I don’t consider imports as big threat to company.
Imports are usually dump near sea ports cities/areas, as transport cost is not feasible for further inland transportation. No significant threat to Satia.

3. Technological obsolesce -
Dr Satia is always on drive to keep manufacturing plant updated and to find new ways to lower costs.

4. Fluctuation in raw material prices
Company gets most of the raw material from surrounding area, and have own pulping facility, so fluctuation in raw material prices in domestic/International prices doesn’t affect much,
However New plant may require buying from outside market, can impact a little on margins.

5. Shortage of Water
SIL has approval from the Punjab State Irrigation Department for fresh Canal water withdrawal of 16,500 m3/day from Arniwala Canal, which is at a distance of 1.8 km.
However, despite doubling the paper manufacturing capacity to 650 TPD, the management intends to bring down its combined water consumption to 21,000 m3/day, implying a steep reduction of ~35-40% planned in SIL’s water consumption.

6. Power
Satia produces 100% of power requirement in-house, so no concerns.
Regulatory changes can be a risk, but possibility is remote.

7. Environmental concerns
One of the most difficult pollutant of paper industry is Black liquor, it is treated in soda recovery boiler and recovered 92-95% caustic soda.

As SIL generates power using such bio-mass feed, It also earns Renewable Energy Certificates (REC), which it sells on the power exchange.

SIL has planted Eucalyptus trees in over 540 acres (leased and partly-owned). This plantation gives multi-fold benefits as it not only handles total treated-effluent (Karnal Technology); it also supplements the SIL’s future raw material requirements.
All effluents are treated to the desired standards and no effluent is discharged into any water body of the state.

8. Expansion
Looking at managements past track record, expansion risk is not a concern.

9. Anti Dumping Duty
Currently domestic industry is protected with anti dumping duty from gov. of India, off course some countries are excluded from this.
Our investment thesis should never be dependent of such things, we should always invest in strong companies who will do great job irrespective of ADD.
Satia is one such a player who will benefit in both cases.
When ADD is inforce margins of domestic players are protected.
When ADD is removed (Already some countries exempted), many small manufacturers will find it difficult to survive, market share shift from high cost producers to low cost producers will only accelerate.
On valuation front I derive comfort as with new capacity, even if ADD is removed Satia should have intrinsic value higher than it trading today.

10. Pricing power
Paper is a commodity and manufacturers have no power over it.
However paper industry is in growth phase in India and so whenever prices fall some weak players go out of business driving supply shortage and prices come back.
Demand is always there, supply side usually move up & down.
When Satia works at 14% OPM(shall rise more in future), we can be sure that many players are in loss, and may go out of business soon, so causes supply shortage, cycle plays over & over again.
If we hold patience in down cycle ( I may even add more) with such a strong player, we can benefit more in the coming up cycle.

11. Customer concentration
Currently SIL commands ~10-12% market share in the State book boards market in India. (40% of revenue for Satia)
High dependency on state board will likely to reduce in future with the new plant on stream. However I think Satias state boards market share will increase in future.
Its not a single state board, and each board to be considered as separate customer, so customer concentration risk is limited.

12. Distribution network
Distribution network is not great at the moment, with new plant coming up they will have to work on this front.

Disc : Invested and can be biased.


Hello @Surender ji,
Thanks for writing,

It produced almost 109cr owners earnings in FY20, Looking at past track record it is expected to produce more earnings in future.
So if we simply discount it at 8% discount rate (10yr g-sec at 6.x%),
It should produce owners earnings in its lifetime discounted to present value gives us todays valuation of company as 1362cr (approximately) without considering future growth,
Company trading at 846Cr, at significant discount even without considering future growth prospects.

Supply is not an issue for low cost producers, they will grab market share from high cost producers, management is also confident in utilize entire capacity in next 2 years.

Even if it was installed way back, management constantly upgraded machinery, significant impact on improvement of margin was due to sub-sequent backward integrations.
Go through presentation/ AR they have provided information.

Yes promotors remuneration is high, but its under regulatory requirements.
Even if JMD is paid less, he is happy to work for Satia (My guess from concalls), and I do agree that he should be paid more.

Satia’s domestic market share is below 1%( Largest player ITC has only 4% market share), there is lot of scope to increase this market share. (Weaker players going out of business and stronger players gaining market share, growing at 12-15% CAGR, I think only 15-20 players will hold 50% market share in next 10 years)
Domestic market itself is growing at 6-7% CAGR
Satia is also looking to grow in export market
Looking at Satia’s management capability I think it is a very long term growth story.


Thanks for the revert @kalpesh4430.

Owner’s earning of FY-20 shall be 94 Cr. after building bottom up (shown below). Also, FY-20’s value was an outlier if you consider a window of 5 Yrs.

Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21
Net Profit 8 13 46 69 88 92 50
Depreciation 53 33 40 45 48 55 58
Working capital changes -29 -28 18 -5 16 -10 21
Fixed assets purchased -101 -79 -81 -67 -119 -43 -120
Owner’s Earning -69 -61 23 42 33 94 9

Capitalizing any years ‘Owner’s Earning’ as a perpetuity does not seem reasonable as the industry is cyclic as evident from above data. Also, the DEBT of ~ 300 Cr. needs to be added to arrive at the enterprise value.

On face value all looks well and management has done a decent job to explain their business via various communications. However, I will park the idea in cold storage due to the below points:

  • Under Tax Head, a significant gap exists b/w the amount shown on the Income statement and the actual cash outflow in the CF statement | Not paying much to the government
  • Promoter (family) pays itself reasonably well in a given year, but hardly anything as dividend to minority shareholders. The same might not change anytime soon as substantial Debt repayment will be due in FY-22 and FY-23. | Not paying much to the Equity Owner’s and I see clues where more capex will happen as soon as current one is in production.
  • The next best man who is closest to the business is paid only 1/10th that of the key man. | Not paying much to the guy closest to the business.

Considering the above, retail investor will benefit only if the market values the business better in future. But, I do not see fundamental characteristics for which market value will be compounded YoY. Idea is not to discourage you, but share an outsider’s view on the same business.


@Surender ji I saw a structural flaw in your calculations of owners earnings,

“owners earning is earnings produced by company considering as per its current plant capacity to be same over it’s lifetime”

“The existing manufacturing facility needs to do some capex to keep generating same unit volume in the future, is called maintenance capex”

and “Owners earning = Net profit + Dep.- Maintenance capex +/-Working capital changes if any

What you have done is you subtracted entire capex instead of maintenance capex.

It is difficult to consider the future changes in working capital, So I consider working capital to be same in future, and ignore it,

Owners earning = Net profit + Dep. - Maintenance capex

So owners earnings calculated are approximate and everybody will come up with slightly different value.

We are only interested in present owners earnings(considering they will be same for the lifetime of company) and calculation of past owners earning are for reference only, we are not interested in them.

So for cyclical businesses some times I take average of 5 years, some times 3 years and some times 1 or 2 years, depending upon structural changes happened for which years in the company…

For Satia I choose to take only FY 20 owners earning,
not taking average of last some years because,

  1. backward integration & operating leverage kicked in and these changes are structural in nature
  2. As per management commentary margins have scope to improve further from here
  3. Capex will kick in next 1-2 years and it provides additional margin of safety.

Owners earnings = 92+55-38 = 109 Cr (Approx.)

Todays value of company considering it will generate same unit volume over its lifetime(ignoring impact on demand due to covid lockdowns) = 109/0.08 = 1362Cr

Debt need not to subtract as owners earnings are calculated by factoring in interest component to be same over the years.
Calculating Enterprise value is a whole different method. You are mixing the two.

Satia get income tax benefits, that is why tax is less.

As long as promotor remuneration is under regulatory limits and looking at value created by them for shareholder over the years, I don’t mind it.

Company is in the growth phase so I do not expect dividends to increase.

By considering growth over the next 4-5 years I expect Intrinsic value close to 3000cr

One important thing I learned is “learn to decide what to ignore and what not to” I let go many excellent investment opportunities in past due to not ignoring the small issues.
This is everyone’s personal decision.

Disc: Invested and can be biased.


@kalpesh4430 – Thanks for pointing the flaw. Indeed, I should have considered only the maintenance capex instead of the entire capex. However, maintenance capex is never readily available. As a better alternative, I should have considered depreciation amount (considering that this business is capital intensive) as the maintenance capex.

On the valuation front, your approach reflects a control perspective, which does not seem apt for a minority shareholder, and hence I suggested considering debt in the valuation.

The expected total return wagon has 3 horses – PE Expansion (depends upon market’s perception about the management, business, industry), capital yield (share price appreciation due to actual/anticipated earnings growth), and dividend yield. In this case, I see only 1 of them (capital yield) in action out of 3. The same may lead to a roller coaster ride instead of a lazy river experience.

Disc: No position. But the same may change depending upon the price offered by Mr. Market and the performance of the business.

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Portfolio as on 26-05-2021 11:30 am

NAME OF COMPANY CMP 26-05-2021 Allocation
TIME TECHNOPLAST 37.98 85.00 25.1%
VIPUL ORGANICS 114.07 176.95 19.5%
PPAP AUTO 259.97 213.70 10.3%
SATIA IND 87.78 84.25 8.9%
KG PETROCHEM 183.57 301.35 12.6%
DHP INDIA 420.48 427.00 9.1%
GNA AXLE 264.99 450.60 11.6%
CASH 2.9%

In the process of deploying cash in Satia Industries,
Next week will update revised holding.

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Hi Kalpesh, any thoughts on Vipul Organics results and the future, heard dye units are having a tough time due to the lockdown and general end users like textile units also not being able to run to capacity

You are welcome!
Using depreciation instead of maintenance capex because it is not readily available gives people who put efforts a huge advantage over lazy investors.
That’s where the edge lies in valuing businesses.

If retail investor not ready to put efforts & learn new things (due to time constraint or any other reason) and want to be dependent on readily available information…I’m personally of the view that they should invest in low cost index funds.

These are my views and some people may disagree.

That may be true and can affect results,
there was a cyclone too in that area(for current qtr), I don’t know how the results would be,
but I expect a good growth this quarter.

But it doesn’t matter a qtr or two, as I have an outlook of next few years.

Portfolio as on 28-05-2021 12.40PM

NAME OF COMPANY CMP 28-05-2021 Allocation
TIME TECHNOPLAST 37.98 88.30 26.0%
VIPUL ORGANICS 114.07 173.20 19.0%
PPAP AUTO 259.97 206.95 9.9%
SATIA IND 86.89 84.85 11.8%
KG PETROCHEM 183.57 317.00 13.2%
DHP INDIA 420.48 423.10 9.0%
GNA AXLE 264.99 430.50 11.0%
CASH - - 0.0%

Hello Kalpesh,
Thanks for sharing deep insights on your portfolio. I have been following Satia industries for sometime now, but always have been in a dilemma to invest in it. I totally agree with your thoughts on the company’s growth but have a parallel doubt, which is as follows,

  1. If we look at the growth of companies in paper sector in developed countries like USA, we notice that even though the top line and bottom line has increased constantly, the market has not rewarded the companies with stock price appreciation in a corresponding manner. They have been stuck at similar levels for quite sometime now.

Thanks in advance.

Thanks for writting!!!
Globaly paper industry is matured in some countries, even declining in some.
That could be the reason for stock price not appreciating in line with earnings.
Rest I don’t know much about US paper industry sir.

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Sold most of PPAP.
Looking for other value buy opportunities,
Neuland lab, Airo Lam are on radar.

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Reason for selling PPAP -
Auto industry has a supply side issue of semiconductor shortage, which may not solve for another year or two.
Commodity prices increased over last few months, which will affect many companies over next one or two quarters.
biggest reason - such a top line was not expected.

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Airo Lam Ltd
Airolam is ranked #7 among the leading brands of the Indian laminate industry

Follows rigid international quality standards like NEMA (USA) and BS1406 (UK). For its superior design, quality, systems & environmental commitment, Airolam has been awarded ISO 9001, ISO 14001, Green Label, Green Guard & FSC certifications

Keep developing new laminates, which excel in quality & affordability

Focus on technological advancements to facilitate better production

13+ years Experience In Laminate Industry
10+ Brands
8+ Branches
Presence in 16+ Locations
69+ Distributors
170+ Employees

Rational steps by management after listing,

  1. High cost debt converted into low cost
  2. Mr Mahindrabhai Patel who had criminal/fraud cases is no longer a director
  3. Management remuneration is rationalised
  4. Many pending tax related issues seen in RHP(2017) are not seen in FY20 Annual report
  5. Number of permanent employees reduced even though sales has increased


Investment Rationale : -

Company don’t seem to have any competitive advantage, but industry has good tailwinds for next few years,

The industry is seeing a shift in market share from the unorganised to the organised sector,
In last 2 years many unorganised small players must have gone out of business, so we can see rapid increase in market share shift.

the changes being made in the goods and service tax in the country has resulted in lowering the price difference of plywood and laminates sector between organized and unorganized sector

Increasing urban population, rising per capita income are other key factors driving the growth of laminates industry in India

ALL is setting up a manufacturing plant of plywood and veneers adjacent to its existing location with envisaged total cost of Rs.6.30 crore and installed capacity of 67.20 lakh square feet per annum.May be completed

ALL has expanded its installed capacity to 48 lakh sheets per annum during FY20 at its existing location considering increase in scale of operations and growing demand from the user industries. –
Seems completed (evident from March21 results - 80cr+ top line.)


It’s a big capacity expansion and from 105cr in FY20 now it can produce 350 to 400cr top line and 15 to 20 cr bottom line(5cr in FY20) , at 80cr market cap it’s no brainier opportunity.

They are sitting on expanded capacity at the right environment, may be luck.
Operating leverage can kick in as capacity utilization increases, bargaining power with suppliers may increase going forward.

Lot of scope to increase dealer/distributor network and penetrate deeper.

Risk : -

  1. No competitive advantage is business
  2. 90L bad debt written off in FY20
  3. Trade receivables for more than six months are consistently very high over the years
  4. They have to push sales through high credit period to its customers
  5. Many micro, small, Medium size competitors exist
  6. Limited to no bargaining power over suppliers from whom company imports raw material
  7. Cyclical Industry

Discl.:- Invested and may be biased
Not an investment advice, data sharing just for study/discussion purpose.

Data source :- RHP, Annual reports, Credit ratings etc


For Airo Lam Ltd business details follow company thread by @nitish


I revisited my thesis and I think I overestimated it


Nice write up Kalpesh. My estimates for top, bottomline growth are more conservative at 20,15% and listing on NSE main platform will be bigger boost (re-rating catalyst) in my opinion.