Pudumjee Paper Products Ltd. – Slow & Steady Demand Growth

Pudumjee Paper Products Ltd. is a newly incorporated company post demerger of Paper Manufacturing & related businesses from the erstwhile Pudumjee Industries Ltd. & Pudumjee Pulp & Paper mills Ltd.

Company Profile
The Company, mainly belongs to Paper Industry and operates in Specialty Paper segment for Wrapping and Food. Grade Packaging Paper, household and Sanitary Paper etc. The Company’s manufacturing facilities located at Thergaon, Pune.
The Hygiene Products Division of the Company markets its Away-from-Home converted tissue products such as Bathroom roll, Kitchen towel, Napkins, dispensers etc. under well received brand name ‘Greenlime’ and mainly focuses on institutional buyers, comprising Luxury Hotels, Airports, Corporate Offices etc.

Here is the Market Size & Growth Data from IPMA for Indian Paper Industry as a whole:

image
Note:

  1. Although a very insignificant part of the overall Industry the segment this company operates in is the fastest growing;
  2. Pudumjee sold 60,483 MT of paper last fiscal a large part of this would be in the Tissue segment. It appears to be a segment leader domestically

image

Note: This segment is also a net exporter.

What I like:

  • Strong Balance Sheet & FCF Generation
  • Likely to sustain & grow revenue moderately
  • Market Leadership
  • Sticky non-cyclical business with flagship corporate clients – Capgemini, Mumbai Airports, Mariott Hotels etc.
  • Fair value at 11x PE despite recent run up

What I don’t like:

  • Low PAT Margin
  • Low Pricing Power
  • Raw Material price increases can hurt profitability

Opportunities for the Company
PUDUMJEE is well-known pioneers in the specialty paper products segment and manufactures a wide range of Specialty Papers ranging from Glassine and grease resistance papers, laminating base paper for flexible packaging, packing tissues for precision engineering components and tools etc., Décor paper for furniture and laminates, label release papers, fine papers for printing bible, parchmentine for textile cones, etc. and M.G. Papers for industrial and other applications, Crepe tissues for bathroom, facial and towel applications, etc. More recently products like papers for baking cakes, etc., paper for pharma packaging, saturating paper for application for mosquito repellent, paper for packing surgical instruments etc., have been added to the range.
Whilst the Company has its marketing channels spread throughout the country, its products are also exported to Europe and other countries with potential for gradual increase in it. The growing awareness and consciousness about cleanliness and better hygiene conditions amongst Indian population offers better opportunities for Company’s products including converted tissue products.
The Company’s manufacturing facilities are currently located at Pune and foreseeing future growth prospects, the Company intends to relocate the facility to Mahad in Maharashtra State in due course which not only offers a much larger area for future expansion with virtually the same locational advantage as being enjoyed but also entitles incentives which Government allows.

Concerns and threats
The Company is dependent mainly on bought out fiber for its raw material requirements and majorly imports them from overseas. The price and foreign exchange volatility substantially impacts its working. Dependence on costlier purchased energy due to lack of Co-generation facilities is another challenge, which though is addressed partially by purchase of bilateral power from Power Plants including Wind Turbines, through open access arrangement and installation of 132/100 KV Sub-station, frequently changing Government’s policy on levies with a view to discourage such a sourcing does, at times upsets working. The paper industry also faces shortage of talented and experienced workforce due to shortage of good institutes offering technical courses for the pulp and paper industry and general aversion to seeking career in the Industry and working in the shop floor.

Disc: Invested

Sources:

  1. IPMA
    http://ipma.co.in/paper-industry/production-trends/
  2. Annual Report FY 17
    http://www.bseindia.com/bseplus/AnnualReport/539785/5397850317.pdf
  3. Pudumjee Hygiene Portal
    http://www.pudumjeehygiene.com/
    http://www.pudumjeehygiene.co.in/
2 Likes

I just had a cursory look at its balance sheet.
Good thing is that the inventory has come down substantially.
LT and ST debts have also come down.

But I can’t understand why management has decided to put about 23cr in mutual funds. Wouldn’t it be better if they use this surplus to further reduce the debt?
Dividend payout is also low considering excess cash and investment in mutual funds.

Company has also provided bank guarantees of about 32Cr in favor of raw material suppliers.

This could potentially be the reason why dividends are lower. They’ve entered into an agreement to lease the current place in Pune for 4 years as a part of the De-merger deal.

As an Aside, the Chairman Mr Jatia drew zero salary last fiscal, I take this as a positive.

Seems like Cigar butt to me …

I am a novice investor and have taken a keen interest in Pudumjee, i see it as a long term investment here is my 2% on what i feel about the compnay. Please let me know your opinions and also tell me if there is something i may have missed.
Pudumjee Paper Products Limited:
The Good:
Current ratio:1.06 (should be greater than one,
implies liabilities and assets are about the same )
Quick Ratio:0.77(should of been greater than one
is excludes inventory for the calculations)
debt/equity:0.29 (is very low implying equity outweighs dept )
Inventory Turnover Ratio: 10.20 ( the higher the better and it has increased
form last year of 4.91)
Operating Profit Margin(%):9.19 (increased from last year 5.79)
Also: the Gross Profit Margin,Cash Profit Margin,Net Profit Margin,
have also increased from last year
So all in all the balance sheet looks good.
Also GST gets reduced for paper and paper products so it could help in q3 numbers
Stock is trading at 1.18 times its book value
Return on Equity is 8.83 which is very good compared to its peers
Return on Assets is 5.14 is also good compared to peers
The Bad:
Yashvardhan Jatia Trust sold 9,465,201 in march 21, which basically means
the promoter are selling their shares.Yet their holdings are still 66%
Cash flows to long term debt: 2.21 which is low compared to its peers
Disclosure:Invested

I see the thread for this company stopped long back. I started following markets in the last 3 years and still consider myself a novice in this arena. Just putting my study over here, might help anyone.

First Lets Cover the Paper Sector, I have few points from CRISIL Research:

The Global Demand for the Paper & Paperboard industry is ~400 mn tonnes. from 2014 to 2019 Demand remained around 400mn tonnes for the paper industry and the demand is expected to stay flat at ~400 mn by 2025.

The Paper sector can be divided into 3 broad segments

  1. W&P (Writing & Printing Paper) (23%)
  2. NewsPrint (5%)
  3. Paperboards (72%)

Paperboards contribute to the majority of paper industry demand.

While the overall paper sector demand is expected to be remain muted for the next 5 years, each sector has different growth projections by CRISIL research.

Global Paperboards segment is expected to clock 3-5% cagr growth in the next 5 years, whereas the W&P paper and Newsprint segment are expected to degrow by (3-4%) CAGR and (8-9%) CAGR.

China is the largest consumer & producer of paperboards globally and has a 100mn tonne capacity.

Let’s talk about the Domestic paper industry:

The domestic paper industry also has the same segments as global, paperboards can be further split into paperboards & specialty paper.

The below image from CRISIL research explains the broad split of the domestic paper industry

While the global demand is expected to remain muted, domestic paper demand is projected to clock 5.5% to 6.5% CAGR over the next 5 years and have an annual demand of 23-25 million, and demand for specialty paper is expected to grow by 10-12% CAGR. Demand for W&P and the newsprint segment is expected to remain flat in the next 5 years and the main reasons are a shift towards digital books, news apps than ever before. The paperboards segment is expected to continue growing on the back of healthy demand from the FMCG, Pharma & food delivery industry.

CASE STUDY: PUDUMJEE PAPER PRODUCTS LTD

PPPL is engaged in Specialty paper manufacturing and has expertise over 40 years in paper manufacturing. The company was initially created as an SPV in 2015 for merging it into the paper business of Pudumjee pulp and paper mills ltd, pudumjee industries ltd & pudumjee hygiene products ltd.
The company is currently operating under a lease agreement in the property owned by promoter group companies. The company operates from Theragoan Pune, where it has seen increased urbanization around the manufacturing plant and facing difficulties with increased compliances.
The company has invested in 80 acres in MIDC Mahad and plans to shift operations gradually over there. Due to Covid and uncertainty surrounding the demand, the company has shelved plans to shift operations to Mahad.

The Companies product portfolio consists of glassine & grease resistance papers, laminating base paper for flexible packaging, packaging tissues for precision engg components, and other tools. Decor paper for furniture and laminates. Fine papers for the bible, parchment for textile cones, papers for baking cakes, pharma packaging, paper for packing surgical instruments.
Hygiene products brand Greenlime has good recall value in luxury hotels, airports & corporate offices.

Things I like about the company:

  1. Company Operates in Specialty paper segment, which is the segment with niche products and good expected growth rate of 10-12% CAGR for the next 5 years.
  2. Company has been consistently improving the operating margins (though still less than listed peers like JK Paper, West Coast Paper Mills)

  1. Company trades at a valuation discount compared to peers

P/S ratio of peers (FY 21 sales)

Pudumjee 0.84
JK Paper 1.59
WestCoast Paper Mills 0.78
Seshasayee Paper 1.62
Emami Paper 0.99

P/E (TTM)

JK Paper 12.9
Seshasayee Paper 12
Emami paper 21
Pudumjee 5.8

FY21 had an exceptional item of 24.5 crores

  1. 71.2% Promoter Holding, No Promoter pledge & Promoter increased stake in last 3 quarters

Things I do not like about the company:

  1. Company is heavily dependent on Raw material for its manufacturing, hence exposure to raw material price volatility and forex volatility

  2. Power supply for the company is a huge concern as there is no co-generation facility for the company. The company has been obtaining power under open access scheme and group captive scheme which would cost lower than the power obtained through discoms. State electricity board imposed levies/tariffs on the company for using power through open access for the years 2016-2019 amounting to 33 crores of which 24.5 crores has been provisioned in 2021. There is still uncertainty about the power supply for the company and how the company would mitigate its power concerns

  3. Company has been planning to move its entire operation to MIDC Mahad and expand capacity, which would require substantial Capex even though the company is expected to receive state govt incentives operating from Mahad.

  4. The company was having significant ICD’s (Inter-corporate deposits) within promoter group companies, which is a red flag for me as it creates multiple transactions with related parties and is difficult to determine if the transaction has been done at arm’s length. ( forensic accounting experts on the forum can help here)

Rating:

My Overall opinion would be that company is poised to have a decent growth of 10% for the next 5 years as the sector it operates in is expected to grow at 10%. capacity utilization is improving and margins are improving consistently for the company. The company also has a very low debt-to-equity ratio. The company also has a good credit rating of - CRISIL A-/Stable by Crisil.

Link to Crisil rating report

Crisil rating report

So at this price, I find this company a decent buy in this buoyed market. the company shifting operations to Mahad, expanding capacity, and resolving its power supply would be the next triggers for the company. But more related party transactions in the future would be a red flag again.

Thanks for reading!!.

Would come up with more study about the whole sector and other good companies in the sector. I am happy to stay corrected if anything is incorrect in the above reading.

Disclaimer: I am invested in the company and this is only for educational purposes. I am not a SEBI registered investment advisor. Do your due diligence before you buy the stock. Microcap investments are illiquid and sometimes exit is not easy. Consult an investment advisor before you buy.

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5 Likes

Why are they investing 75 cr on a guest house in Mumbai ?
I would appreciate if anyone has any idea and can share it?