Ruchira Papers - Low downside high upside

yashkj · June 24, 2015, 9:24am

Ruchira Papers – Market Cap 62 crs; Debt 57 crs; Enterprise Value 117 crs
Source of Idea – Debt Capacity Screen

The Company is engaged in manufacturing of Writing & Printing Paper which is used for manufacturing of Note Books, Publications etc. and Kraft Paper which is used as a Raw Material in Packaging Industry. The factory is based in Himachal Pradesh close to Baddi, which is an important centre for FMCG and Pharma manufacturing.

Tax Benefits - The Company being located in Himachal Pradesh is presently entitled to 100 % excise duty exemption for 10 years with effect from 30.03.2008 for the Writing & Printing Paper unit and concessional rates of Central Sales tax at 1.5 % against 2 % in other states. The Company having a Captive Power Cogeneration Plant, which helps to get the cheap and uninterrupted power supply. We are consistently complying with Environmental norms regarding Chemical recovery and have
our own chemical recovery system in place. Further, the location of the factory at the outskirts of Himachal Pradesh helps to get raw material agro residues from the neighboring agricultural rich states of Haryana and Punjab. (Excise exemption for Kraft paper lapsed in 2014)

Operational & Financial Details

Liner Kraft Paper Mar-11 Mar-12 Mar-13 Mar-14
Installed Capacity (MT) 52,800 52,800 52,800 52,800
Capacity Utilization 95% 97% 94% 90%
Production (MT) 50,014 51,097 49,706 47,722
yoy 2% -3% -4%
Sale (Rs crs) 121 125 123 123
yoy 3% -2% 0%
Realisation (Rs/MT) 24,233 24,502 24,725 25,796
yoy 1% 1% 4%
Contribution to Sales 48% 44% 41% 38%
Writing & Printing Paper Mar-11 Mar-12 Mar-13 Mar-14
Installed Capacity (MT) 33,140 33,140 33,140 33,140
Capacity Utilization 106% 121% 123% 125%
Production (MT) 35,066 40,173 40,791 41,425
yoy 15% 2% 2%
Sale (Rs crs) 133 159 173 200
yoy 20% 9% 15%
Realisation (Rs/MT) 37,960 39,654 42,515 48,207
yoy 4% 7% 13%
Contribution to Sales 52% 56% 58% 62%

Higher capacity utilization has led to improving cost efficiency and better asset turns. Return ratios have improved to at least cover the cost of capital since 2012. Sales mix has also changed in favour of the more profitable WPP line.

Key Financial Information Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Comment
EBIT Margin excld OI (%) 9% 10% 13% 12% 9% Margins are volatile due to input costs. 10 year avg EBIT margin is 10%
Fixed Asset Turns (x) 1.5 1.8 1.9 2.1 2.3 Better capacity utilization & Depreciation
Return on Equity (%) 6% 11% 20% 16% 12% Led by asset turns
Retun on Invested Capital (%) 8% 11% 16% 14% 12%
Debt (Rs crs) 132 124 88 74 57 Debt has halved over 5 years Working capital management is good.
EBIT (Rs crs) 22 30 40 37 30
CFO (Rs crs) 27 27 43 31 30
FCF (Rs crs) 26 25 38 24 24 Maintenance Capex is being done.
Debt to Equity (x) 2.1 1.8 1.1 0.8 0.5
Interest Coverage (x) 1.3 1.6 2.5 2.9 3.0
Dividend Payout (%) 0% 0% 11% 15% 23% Excess cash being returned to shareholders

As is evident, the financial metrics have improved considerably over the last few years. The addition of new capacities is paying off now. (The company set up its new WPP line in 2008)

Risks

Paper is a commodity business. It is capital intensive with high labour & power costs.
Tax exemptions expire in 2018 for WPP. They have already expired for Kraft paper in 2014 (this could be one reason for lower margins in FY15)
High raw material prices are unlikely to be passed on to customers and will increase working capital requirements.
Borrowing costs are extremely high at 16%. Although the credit rating has improved, this has not yet translated into lower interest rates for the company.
Management compensation is too high (6 lakh per annum + benefits). This isn’t a deal breaker, especially since related party transactions are not material.
Management may want to increase capacity which would be a deal – breaker. However reading of the annual report suggests that they will sweat the assets more before doing this. I think any capex expansion is unlikely before 2018 when the tax benefits expire.

Valuations
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15
Mcap 33 22 27 27 61
P/E 8.5 2.9 1.6 1.7 4.8
EV 163 145 110 97 116
EV/EBITDA 4.8 3.5 2.1 1.9 2.9
P/B 0.5 0.3 0.3 0.3 0.6
Dividend Yield 0% 0% 7.1% 8.4% 4.8%
FCF estimated 26 25 38 24 24
P/FCF 1.3 0.9 0.7 1.1 2.6
EV/FCF 6.3 5.7 2.9 4.1 4.9

Where is the margin of safety?

Let us look at a bad scenario for the company. Let us assume the financial performance of the FY11 repeats for the foreseeable future.

Pro – forma financials Mar-16 Mar-17 Mar-18 Mar-19 Mar-20
EBITDA (incl OI) 34 34 34 34 34
Depreciation 9 9 9 9 9
EBIT 25 25 25 25 25
Interest @ 16% 9 8 6 5 3
PBT 16 17 19 20 22
Tax @ 33% 5 6 6 7 7
PAT 11 11 12 14 15
Dividend @ 20% 2 2 2 3 3
Debt Repayment 8 9 10 11 12
Debt at end 49 39 29 19 7

Although this is not the worst case for the company and certain simplifying assumptions are made (no deterioration in working capital management, no loss years etc), I think this is a good proxy for steady state operations in a bad environment for the company.

Why not earlier years taken as proxy – the WPP plant was made operational in 2008. I have taken the FY11 as it would be the 3rd year of operation giving a better indication of steady state operations. Although this is arbitrary I believe there is good reason for the same (FY10 & FY11 annual reports; power consumption per tonne of production trends down from FY11)

Assuming these numbers hold let us value the stock on P/B & EV/ EBITDA

Price to Book Mar-16 Mar-17 Mar-18 Mar-19 Mar-20
Networth 114 123 133 144 155
RoE 9% 9% 9% 9% 9%
P/B x (RoE/12%) 0.8 0.8 0.8 0.8 0.8
Market Cap 88 96 104 113 122

EV/EBITDA Mar-16 Mar-17 Mar-18 Mar-19 Mar-20
EV assuming 3x multiplier 102 102 102 102 102
Debt 49 39 29 19 7
Market Cap 53 62 72 83 95

The 5 year return in this case is 9% p.a. assuming EV/EBITDA multiple of 3x. Using P/B the return is higher at 15% p.a. Both are excluding dividends. This in my view is the worst possible return assuming steady state operations.

This would be proven false if the company makes losses in an extremely unfavourable raw material environment.

In an optimistic scenario of FY15 performance continuing with fall in interest rate for the company and a slight rerating to 1x P/B or 5x EV/EBITDA the return could be as high as 30% per annum for 5 years. This could easily be a

Conclusion- BUY

Asymmetry is high and in our favour. Chance of absolute loss is low and is likely only if the performance deteriorates significantly. This is a very low chance event.
Liquidation value (roughly calculated) is probably close to 40 crs. But this is most definitely a going concern and likely to remain so for a long time.
Monitor raw material costs and peers to get a sense of the environment. Only a poor cost environment can spoil this party.

Position size recommended – between 2% to 4% of portfolio at initial buy.

Disclosure - I own the stock

nareshkatariya · June 26, 2015, 7:32am

Yash, Great post. Like your case for this stock. One more point: Promoters have steadily been buying up stock. Their stake was 54.82% in Dec 2012 and has steadily risen to 59.51% in Dec 2014

jeyakumarv · June 29, 2015, 7:18am

As is it in Paper industry , i think kuantum papers has better number than ruchira paper .
Kuantum paper is available at marketcap of 1.2XEBITA. I think downward risk is limited .
Company is reducing it debt . Available at P/E of 3.23 .

i am new stock market so i like you compare ruchira with kuantum paper.

inteliinv · September 30, 2015, 3:13pm

My note on Ruchira

Ruchira Papers
CMP: 43.xx
Market Cap.: ₹ 97 Cr.
Book Value: ₹ 49.59
Stock P/E: 6.4
Dividend Yield: 3%
Face Value: ₹ 10.00
ROCE 3yr avg: 17.61%
ROCE: 18.60%
Debt: ₹ 57 Cr.
Inventory turnover ratio: 8.35
Inventory turnover ratio 3Years back: 6.90
Profit growth: 24.02%
Profit growth 3Years: 57.81%
Promoter holding: 59.51%
D/E is 0.54
Dividend Payout Ratio: 17.60%
Return on equity: 16.97%
Pledged percentage: 0.00%
Interest Coverage Ratio: 3.76
Contingent liabilities: ₹ 6.08 Cr.

About Paper Industry (From the AR itself):
The paper industry in India could be classified into three categories according to the raw material consumed.

Wood based
Waste paper based
Agro based.

The Indian paper industry produces 10.11 million tons paper per annum, just 1.6% of the total world production of 394 million tons. The Scandinavian countries, USA, Russia, China, Indonesia and Japan are the major players in the field of pulp and paper. These countries have some of the best available raw material for paper production and state-of-the-art technology.
In accordance with the economic growth and it is estimated to touch 13.95 million tons by 2015-16. Paper in India is expected to see an average growth of 7 per cent during the next year according to prediction by the Indian Pulp and Paper Technical Association. The sector is expected to grow 7 per cent per annum.
Currently, the Indian industry is accounts to about 2.5 per cent of the global production of paper. The mills use a variety of raw material viz. wood, bamboo, recycled fibre, bagasse, wheat straw, etc.; approximately 35% are based on chemical pulp, 44% on recycled fibre and 21% on agro-residues. The per capita consumption of India stands at only 9.3 kg compared to China’s 42 kg, Indonesia’s 22 kg, Malaysia’s 25 kg and the US’ 312 kg. Studies have shown that the growth of paper consumption changes from linear to exponential trends once the GDP growth rate crosses the double digit mark. Analysts often draw comparisons between the growth seen in bottled drinking water and tissue paper industries.
There are about 750-800 paper mills (Organized & Unorganized sector) in the country out of which 12 large units accounts for production share of about 30% and balance units mostly comprising of medium and small paper mills with production share of 70%. Wood based industry accounts for 31% of production while waste paper and agri residue accounts for 47% and 22% respectively. Capacity wise industrial paper accounts for about 40%, Writing & Printing paper 35%, specialty paper 6% and Newsprint 19% of total production.
The major players of the industry are located in Andhra Pradesh, Tamil Nadu, Maharashtra, Punjab, Madhya Pradesh and Gujarat
The key challenges to be met is market conditions which are poor and technology obsolete, lacking ability in achieving economy scale and lack of skilled labour.

About Company:
Ruchira Papers Limited setup by three partners and is into paper manufacturing with agriculture residue and waste paper as raw materials material rather than the traditional raw material wood pulp which is quite difficult to source. The Company started operations in 1983 with manufacturing of Kraft Paper that is used for packaging, corrugation, core pipes, cones etc.
With setting up of 100 TPD Writing and Printing Paper plant in the year 2008, the Company has widened its product base in multi-purpose Writing & Printing segment of Paper.
At present, the installed capacity of the Kraft Paper unit is 52800 MT per annum and for Writing & Printing Paper unit it is 33000 MT per annum. Presently the Company is operating more than of its installed capacity. The increase in education expenditure will definitely require more Writing & Printing Paper and the management anticipates a faster growth rate of Writing and Printing Paper. Writing paper commands a higher realisation and higher margin when compared to Kraft Paper.
Indian Paper Manufacturers Association (IPMA) projects that India’s demand for paper is expected to double to 20 million tonnes by 2020.
Due to the ecological problems caused by usage of plastic materials, paper is becoming the most favoured option for packaging.
The growth of the manufacturing sector will also enhance the demand for Kraft paper.

In FY15, Ruchira clocked total revenue of Rs. 347 crores, net profits of Rs. 13 crores and cash profit of Rs. 23 crore.

Promoters have been able to achieve production higher than the installed capacity with help of debottlenecking. In FY15, the Kraft Paper production reached 102% while that of Writing paper reached to 131% of its capacity.

OPPORTUNITIES AND THREATS
The global paper industry is witnessing a fundamental change with the demand shifting to emerging economies particularly Asia. The paper industry in China and India has emerged to be among the top global players and are expected to improve their ranking significantly in the coming years. India in particular has good growth potential. The low current per capita consumption of paper in India, around 9.3 Kilograms as against the world average of 57 Kilograms, reflects the significant potential that the industry offers in the future. Increasing usage of high speed printing/copying machines with colour reproduction is propelling demand for high quality Writing and Printing papers. This trend will be beneficial for the Company.

Opportunities: The Company being located in Himachal Pradesh is presently entitled to 100 % excise duty exemption for 10 years with effect from 30.03.2008 for the Writing & Printing Paper unit and concessional rates of Central Sales tax at 1.5 % against 2 % in other states. The Company is having a Captive Power Cogeneration Plant, which helps to get the cheap and uninterrupted power supply. Consistently complying with Environmental norms regarding Chemical recovery and is having its own chemical recovery system in place. Further, the location of the factory at the outskirts of Himachal Pradesh helps to get raw material agro residues from the neighbouring agricultural rich states of Haryana and Punjab. Per ton production cost of paper from agricultural residue is lower than that from the imported wood pulp. E-commerce led demand of corrugated boxes which are made out of Kraft Paper to benefit Ruchira. Kraft paper production for Ruchira grew by 14% YOY.

Threats: As the Indian Paper market grows it is attracting major international players who have access to better technology to setup business in India. The Company recognizes this challenge and has made conscious efforts to build a strong competitive advantage through increased brand equity, wider network and use of contemporary technology. Further Import duty on paper & paper board for ASEAN countries has been reduced from 2.50% to 0% with effect from 01.01.2014 which had implications in terms of cheaper imports being 2.25 million tonnes in 2013-14 as against 2.03 million tonnes in 2012-13. The Company has been also increasing its reach in the rural markets by increased distribution and customized packs. Further steep increase in Raw Material prices and shortage of raw material is creating threats for the paper industries. Lower Growth in Paper Demand due to digitization.

PRODUCT ANALYSIS
The Company is engaged in manufacturing of Writing & Printing Paper and Kraft paper. Writing & Printing paper is manufactured from virgin pulp (agro based), which finds its usage in manufacturing note book and for printing and publishing, a special grade of paper is also manufactured for wedding & greeting cards, art sheets & coloured scrap books, drawing sheets & paper for multipurpose office use. The market for Writing and Printing paper is expected to grow by about 9% annually over the next 5-7 years. The industry will see acceleration in the trend that favours branded and value added products.
Apart from Writing and Printing Paper, product range of Company also includes Kraft Paper which finds its application in the manufacturing of corrugated boxes, corrugated rolls for industrial packaging. The Company also manufactures a special grade of Kraft Paper known as DTY/POY grade which is used in the manufacturing of textile tubes and in wrapping of different types of Yarn.

My Investing rationale:
• Increase in promoter stake by 5% in last 3 years.
• Cheap Valuations
• Ecom Boom
• Textile Boom
• Manufacturing sector getting a boost
• Dividend Yield acting as a cushion
• Free cash Flows

Discl: Invested. Please do your own due diligence before investing.
Inputs have been taken from screener, moneycontrol, AR of Ruchira Papers and prosperotree.com

Regards
Sri Krishna Bhutra

inteliinv · November 17, 2015, 2:55pm

Company posted good Q2 results. A strong performer in the paper sector.

abhishek90 · November 18, 2015, 4:24am

Hi,

Nice write up…but I don’t see any moat in this business…in paper till I understand there is branding but the switching costs is too low… Customers will switch over easily in case of new competitors bringing in cheap or differentiated products…paper sees demand from manufacturing sector only…i don’t see any increase in demand for Kraft papers-which is used by children generally…i might be wrong also here…
Is there any increase or doubling In capacity…which can give good returns…can you elobrate on this point

HimanshuGajria · April 6, 2017, 8:33pm

This company might just have a Moat. I was researching another company in the same industry when I came across a post on this very website on the NR Agarwal thread that goes something like this - “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.”

The discussion that was going on primarily on that thread was whether the prices for the traditional source of the raw materials for the paper industry would go up and if what they said in the thread was true (that the primary raw material for the paper industry is cyclical in nature and would affect the cost), then Ruchira Papers has an advantage over many of their competitors as Ruchira uses non traditional alternative raw materials as mentioned in the above quoted paragraph.

Note : The quoted paragraph is not from a verified source. It is from a user post on this website.

jagjit8277 · May 25, 2017, 12:28pm

Good Q4 numbers from the company. Company uses agricultural residue for paper manufacturing which might give it further advantage considering the recent push from states like Delhi, HR and Punjab to stop burning of agricultural residue and reduce pollution.

Promoters stake has also increased in the company to 61% by Dec 16. so looks good overall.

rkothuri · May 25, 2017, 8:27pm

Does anyone attended concall? What’s the impact of expiring tax benefits in FY18? what’s the interest rates for the debt?

narenarora · May 26, 2017, 5:23am

Ruchira Q4FY17 Concall - 23/May/17

Sales - Qty (Tons) FY16 H1FY17 Q3FY17 Q4FY17 FY17 H2FY17
Kraft Paper 52000 31944 66064 34120
Writing & Printing Paper 47000 24540 49972 25432
99000 56484 116036 59552

Average Price FY16 H1FY17 Q3FY17 Q4FY17 FY17
Kraft Paper 25.50 25.3 up by 5.35% 24
Writing & Printing Paper 49.00 48.6 55-56 51.94

Kraft Paper
Current prices around 27-28 in Q1FY18. Kraft prices can come down. If FMCG does well it will sustain.
There is 50% incremental cost in Kraft paper. Only 15-20% of incremental Rs.3 would flow to ebidta
The waste paper price increased from 13 to 17 per kg (this is RM for kraft paper). Agro and waste paper (50:50) RM proportion in kraft paper

W&P Paper
Current prices around 59 in Q1FY18. It will sustain and no reason to come down
No corresponding increase in costs in W&P. Entire gain flows to ebidta

Sales - Value FY16 H1FY17 Q3FY17 Q4FY17 FY17 H2FY17
Kraft Paper 133 81 0 159 78
Writing & Printing Paper 230 119 0 260 140

Installed Capacity Mt P.a.
Kraft 52800 Price rise of 5-6% in Q4FY17
Writing & Printing Paper 33000

Total production in FY17….116000mt
FY18E production guidance ……128000mt (press release). 72000 for kraft and 56000 for W&P

Capacity utilisation …140%

With increase in volumes we are looking at some value addition. Would give details in next quarter

4-5% pricing growth for FY18 coupled with 10% volume growth. Topline growth by more than 15%
EBIDTA margins…. More than 16% in FY18

No major capex. Will do small investment for debottlenecking

Planning to make superior quality Kraft paper using imported waste paper
There would be lesster competitive pressure for superior quality kraft paper
Also peers would be using 100% imported paper whereas we would be using 50% agro

Agro RM prices are soft currently. No increase

The margins lower in Q4FY17 on sequential basis due to year end provisions….gratuity, annual qty bonus, salary increments, etc.

Lower production in southern region due to water issues and Ballarpur plant shut down have contributed
to price rise

Will the price not go in second half (as the usual case) as the capacity in south would come back due to rains
In the current year we don’t see paper companies carrying stock at end of Q2FY18…. Which will help sustain prices

jagjit8277 · May 26, 2017, 7:49am

Thanks for sharing the notes. Was there any guidance shared on the overall growth for FY18?

narenarora · May 26, 2017, 8:31am

"4-5% pricing growth for FY18 coupled with 10% volume growth. Topline growth by more than 15%
EBIDTA margins…. More than 16% in FY18 "

This was part of concall notes posted above.

regards

…

jagjit8277 · May 26, 2017, 9:00am

Thanks. Apologies, i missed it in your notes above.

I plan to hold this for next 2 years. Most of the paper companies are coming out with good results.

rkothuri · June 16, 2017, 3:12am

Looks like raw material cost shouldn’t see increase due to good monsoon. Same is being discussed in the concall.

From the company presentation it looks like they are going to expand the margins by operating efficiently instead of expanding market share. They are looking to have new applications where in which paper can be used, I.e they are expanding the market.

Anyone has idea on to what level margins can go up?

rkothuri · June 25, 2017, 11:24am

Dolly Khanna has been increasing the stake quarter on quarter.

From 1.15% stake in Sep-16 to 1.76% in Mar-17.

rkothuri · June 26, 2017, 6:00am

They are currently enjoying 6% excise duty exemption for Kraft paper which will be expiring on Mar-18. They have to look at GST rates and how it will impact going further.

Also, the debotteleneck program is done with a capex of ~Rs. 39 cr out of which 13 is internal accruals and 26 is debt at 11.75% interest rate. Interest rate is on a bit higher side but company is planning to clear off debt by Sep-19.

Aditya942000 · July 13, 2017, 3:42pm

As far as valuations are concerned Shreyans Industries is available at discount as compared to Ruchira papers.
(Dolly Khana have stake in Shreyans Ind. too)
But the management quality of Ruchira seems to be more open and better than the Shreyans.
And moreover Ruchira papers have been continuously making efforts to increase its production capabilities and they seem to be confident enough about their business.

Excise benefit which was available pre gst regime will continue to be there as govt. is considering reimbursement scheme.
As per my knowledge is the GST rate @12% on paper is far lower than earlier rate of around 30%.
http://economictimes.indiatimes.com/news/economy/policy/gst-reimbursement-scheme-on-fast-track-says-government/articleshow/59431927.cms

kritesh_abhishek · July 16, 2017, 8:27am

Ruchira Paper’s financial looks good. Sales and Profit are increasing quarter-by-quarter. Company’s PE is currently 10.6 compared to Industry PE of 11.35. Sounds like a good stock to buy.

Source: Screener.in

rkothuri · July 16, 2017, 11:12am

Yes, the sales are increasing but I don’t think any re-rating on the PE front can happen at the moment unless there is a increase in EBITDA margins. Also, ROIC is consistently around 10%. Due to heavy competition it will be difficult to increase the price to the end customers (they might not be sticky as they can easily move to a new supplier).

Here is a summary of return ratios:

One interesting thing is that working capital is reducing y-o-y with increase in sales. Which is a good sign.

Debt is reducing and management is planning to reduce all debt in couple of years. Also, there are no plans for new capex currently.

Also, colored paper sales are increasing y-o-y which command a premium of 2-3 rs. per kg over normal white paper.

They are keeping the expense cost at a consistent level:

This year increase in capacity will help in increasing the sales as they are already operating at full capacity level.

As monsoon is good this year there could be a chance the raw material cost can come down which will help increase margins.

Management looks sensible but one concern I have is management remuneration.

This is way beyond the 10% ceiling act. This needs to be looked close.

Overall I feel this is a steady compounding business to own. Currently I don’t have any position and is in list of potential buys.

amrutayan · August 7, 2017, 10:40am

Great write up! Just to add on the above pointer, management seems confident of a 5% uptick in prices - guess this is driven by the fact that no new capacity is coming online in the market with few facilities of a large competitor having been shutdown. Sharing an excerpt from the conference call transcripts where management guides for 15% topline growth driven by 10% capacity addition and 5% pricing.

Also, management has at multiple points of time mentioned that demand should not be an issue at-least for the next 3-4 years.

Disclosure: Not invested yet but tracking the business actively.