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.
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.
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.