N R Agarwal Industries Ltd (NRAIL) is a pioneer in development, manufacturer of quality finished paper products by recycling of waste paper and marketing in domestic and international markets. The twenty three year old Company is an integrated paper and board manufacturer with a total production capacity of 288,000 TPA. The Company produces a range of premium grade Duplex Board, Writing and Printing, and Newsprint Papers for domestic and export markets. Each of these products offer a differentiated proposition and is targeted to meet unique needs of discerning customers. The company has 5 units in Vapi and has completed expansion in October 2015 only.
There has been an uptrend in the paper prices and utilization in the last one year and the company has been delivering stellar results to that effect. Inspite of the Demonitisation the Company has posted a EPS of Rs 11 for the Quarter, which works out to be an annualized EPS of Rs 44. The Current share price of the Company is Rs 220 so based on the Last quarter EPS annualized the Company is quoting at a PE of 5 only. The current MCAP of the Company is 365 Crs . The current annual sale of the Company is expected to be around Rs 1,100 Crs. The Company has been constantly been reducing the Debt and the rating has been upgraded to B+ by India Rating in Nov 2016 https://www.indiaratings.co.in/PressRelease?pressReleaseID=25052&title=Ind-Ra-Upgrades-NR-Agarwal-Industries-to-‘IND-BB%2B’%3B-Outlook-Positive
As per the rating agency justification
In FY16, NRA’s net leverage (net debt/operating EBITDA) and gross interest coverage (EBITDA/gross interest expenses) improved to 5.34x (FY15: 11.94x) and 1.43x (0.85x), respectively, owing to the improvement in EBITDA margins. Gross interest coverage for 1HFY17 stood at 3.1x. The agency expects operating margins to correct slightly over 2HFY17 owing to an increase in coal prices. Nevertheless, credit metrics for FY17 and FY18 are expected to be better than the FY16 levels because of higher sales mix of higher margin yielding writing printing paper product segment. Also, the company does not have any major capex plans.
Reason for Investment Positive points
High Promoter Holding of approx. 74%
Uptrend in Paper industry
The Company has recently done a price increase in various products which will directly increase the bottom line impact
The company is continuously paying off its Debts which will reduce also have a positive impact on the bottom line
The company is currently available at a market cap to sales ratio of 0.3 which is the best in the paper industry
Negative:
The share prices has risen from a low of Rs 40 to around Rs220 with a high of Rs 260. The share price has been hovering around Rs 200-260 levels for the past 6 months
I believe the positive are more than the current negative and has the potential to still grow substantially from here on as market is yet to take into consideration the positive resulting in EPS expansion the ROE and ROA will increasing substantially.
I thing the reason for low P/E is because of high D/E - more than 3.5. For stock to be a value buy, the debt has to come down significantly as most of its competitors have D/E less than 1.
One ticking time bomb for paper stocks is raw material prices. Eucalyptus and Poplar wood is grown by farmers in Agroforestry . It is used as raw material. The prices are too low I .e. unviable for farmers. Wood prices are lower than sugar cane price in India. Wood matures in 7, 8 years. Farmers are finishing trees very fast as they are losing money. No new plantation. It may trigger wood prices up causing paper industry in loss. Recent rally is the result of high paper price and low wood price. Wood price is Rs250 per quintal instead of Rs 900 per quintal in 2010-12.
That sounds like a typical cyclical. As price becomes unattractive, the crop goes out of fashion leading to an increase in price over time and then a bust due to oversupply.
My view is there is a current uptrend in paper prices as Ballarpur industries has closed couple of plants.Paper plants in Tamil Nadu are not working fully as there are drought like situation .It is a call on First the industry how do you feel the industry will perform for the next couple of years & then on the Company.If you are bullish on paper industry than you shld definitely look at this company
Fantastic points!!
In this case, there are high chances of paper prices going up. I feel paper mills which produce through alternative raw materials will have a wonderful opportunity. Is’nt it??
Can somebody who is tracking this industry tell which are the alternative raw materials and ifso, which cos. are currently doing this in India??0
One that I can think of is Ruchira Papers that uses agriculture residues like Wheat Straw, Bagasse, Rice Straw, Sarkanda, etc. as its major raw material rather than the traditional raw material wood pulp which is quite difficult to source.
Screenshot from screener.in attached.
100% promoter shareholding is pledged
The company has raised debt continuously over last 10 years.
ROE is negative.
TNPL, much bigger player in the industry, is trading at a lower P/B and compelling P/E. So if the play was more on the industry, why should investors not consider other bigger and more well run players?
Some of the players seem to have backward integrated - they make their own wood. I don’t know if NRA has done that.
Baggage, paddy husk , wood etc all bio mass rates are cyclical. They effect each other. I don’t know all mills but Century paper mill in Lalkuan Nainital uses all type of materials always whatever the rates. So I don’t think the mill running on alternate raw material will survive. Paper industry is cyclical cyclical, that’s it. We should know the exit timing. Without wood paper industry can not survive on only bagasse, husk, sarkanda etc.
Hi value investors promoters holding 100% pledge was they were continuously on expansion spree resulting in increased borrowing & providing of collateral of promoter shares . You are ignoring the fact that they have a high shareholding of 74%.Further due to draught like situation in South none of the paper mills are working optimally.This situation is likely to remain for at least 3-4 months.You can just Google to find that TN newsprint has closed its plant due to water shortage & I.e the reason for fall in it’s share price.
