Satia Industries - Journey towards Cyclical to Shallow Cyclical?

Rafi_Syed · February 28, 2022, 5:57pm

Satia Industries

Background

Satia Industries Limited (SIL), is one of the largest Agro and Wood based paper manufacturers in India. SIL was incorporated by Dr. Ajay Satia in 1980 and commenced its operations in 1984 with a small capacity of 4,850 tonne per year to 255,500 MTPA by the end of FY22.

Main Products/Segments

Main Products/Segments

The company is mainly into paper and packaging products, recently they forayed into producing food packaging products; working in collaboration with American company Zume.

(Zume is also selling on Amazon India )

Product Portfolio : Snow white , Super Snow white, Ultra White, Ultra Print, Coloured Paper, Cover Paper, Photo Copier, Ledger, Ultra Shine, Natural Shades, Paper Cups, Food Packaging Products & Wood based cutlery

The picture says it all, along with traditional paper products they are venturing into products that are catering to food industry, products that replace single use plastic items like plastic bag, coffee cups , cup lids , takeaway food containers that are produced by using biomass. This is the future growth lever for SIL.

Here is the latest statement from the company

SIL has entered in a formal association with Zume, a US-based global brand in sourcing of packaging products used for meal boxes, beverages and Face Masks, etc

Current Paper Industry Structure in India / World

Capital Intensive Business

All these days industry is struggling due to cheap paper / pulp imports from China and ASAN. Now China banned waste import into the country hence the cost of pulp production has become expensive. At the same time many European countries are now using their waste for captive consumption.

There is huge push by the governments in the western world on the business to use more recycled material. On 1 January 2021, the European Union introduced a levy on non-recycled plastic packaging waste. The levy will be charged to EU Member States at €800 per tonne with revenue generated contributing towards post-pandemic recovery.

Here are the latest M&A in Europe to push more into Circular Economy.

India’s central government announced the ban in August this year, following its 2019 resolution to address plastic pollution in the country. The ban on most single-use plastics will take effect from July 1, 2022

India - Industry is a fragmented market, less than 10% is with the branded players.

Source

Industry Consolidation

GST and Pandemic hit very hard the fragmented market. Many small players to survive hence the share is now going towards organized players.

https://www.financialexpress.com/industry/india-losing-out-on-paper-exports-to-china-mills-shut-down-for-imput-cost-hike/2357481/

Many PSUs are also shutdown. (Two recently in Assam). There are many shutdown / stopped production due to shortage of coal or high coal prices.

Satia Key Strengths

Technical Collaborations with Zume USA (Who are supplying technical know how on biomass based paper pulp - food packaging products )

Processing Stages

ESG

Capacities / Order Book

Total Installed Capacity as of today - 255,000 ( 700 Tons a Day , this includes a new capacity PM4 that has come online on 7th Feb 22 with 1 Lakh Ton Per Annum, this capacity is fully booked for the month of February )

Started commercial production from cutlery machine having an installed capacity of 5 metric
ton per day. (Waiting for the approvals for the concerned authorities , might be Zume’s requirements)

Technology / Plant Capabilities

Installed DD Washer ( https://www.youtube.com/watch?v=KYh6Ipi0TO4 )

BENEFITS:
• Multiple washing stages on a single drum
• Compact design • Extremely high washing effi ciency
• Extremely energy effi cient
• Fractionated fi ltrates to conserve water
• Retains fi ber qualities: less fi ber damage when no mechanical pressing
• Fast start-up and high availability
• Production throughput up to 6,250 t/d in a single unit

Process Efficiencies achieved due to this : Due to this multiple stages are combined into one, that releases space occupied by two steps “ the wood line bleaching “ and washing that has been emptied. This space is now used to produced additional 50-100 ton pulp.

Biomass based Boiler ( Link https://youtu.be/7Laj8j64I-Q )

Rice straw is used as biomass for this boiler (earlier Husk is used which has now become expensive at 7,000 rupees per ton , now along with Husk Setia is using Rice Straw, which is burned by farmers , the coast of this is 2,000 rupees per ton ) , planning to setup two more boilers next year

Allimand Paper Machine (Best in Class )

The below technology is used by other companies like west coat papers (Satia can explore this as well )

https://www.haberwater.com/case-studies/indias-largest-specialty-paper-manufacturer-reduces-cost-of-raw-material-while-improving-quality

Some Links

Reports

https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Manufacturing/gx_us_consulting_Turningthepage_06212012.pdf

Related Links in VP Forum

Earnings Projection based on Q3 Commentary

Image Courtesy @rajanprabu

I will add some more findings shortly

Thanks to @harsh.beria93 for sharing lot of industry data and research reports.

Disclosure : Purpose of this post is to learn about the industry, I don’t have any positions in any of the paper companies including Satia

VishalVerma · February 28, 2022, 9:28pm

Great insights Rafi.

Seems like 50% of new capacity will be for making copier paper. And that also provides higher margins.

There are a lot of tailwinds going for Satia, with demand coming from various angles - reopening aiding textbooks, new packaging, increased capacity etc.

What about the risk from cheap imports ? Also do you know the industry capacity situation in general. If everyone is adding capacity, it will lead to a lot of competition.

Rafi_Syed · March 1, 2022, 12:25am

If anyone wants to understand the Paper Industry structure , Satia Q3FY22 Concall is the place to go

I will try to extract some key learnings from this call and group them into relevant categories.

Key Drivers

Government banned all the single use of plastics from July 2022
*There is huge demand for the alternate products that are based on biomass.
Exponential growth of eCommerce going to drive more paper usage in Packaging
There is huge push by governments all over the world to reduce plastic usage
In EU , business have to prove they are using recycled plastic material or switch to alternate products
China banned import of waste paper , this event has triggered developed nation start their own recycling , there is EU ban on exporting of plastic waste as well (This is the main reason why the pulp prices have gone up internationally, otherwise the imports were cheap that was the cause of low asset turnover in india all these years , cheap imports from ASAN countries, and zero import tariff )

Operating Leverage

Revenues were growing from around 12.3% in FY16 to 23% in FY21
Key attributes to this growth are

Sales realizations have improved (Product Mix - Wedding cards, paper cups, plates etc… )
Own Power Plant ( from 5MW capacity to 41 Megawats, buying power at 7 rupees from the grid vs producing at 2 rupees ) , not only this helped to save on costs, but managed to earn carbon credits that gave additional income in the form REC bonds that are sold on IEX.
Custic soda recovery plan - managed to extract 120-130 ton caustic soda ( 95% recovery, current market price for a ton of caustic soda is 50,000 rupees a ton )
Operational efficiencies
Waste water is treated and used in Eucalyptus plantation of 600 acres, this wood can be used as feedstock if required, at the moment satia selling this in open market for a good price, trees are matured in 5 years, this is treated as agri. income and no tax on this.

Backward Integration / Capacities / Debottlenecking

Going to increase in house agro based wood pulp capacity from 200 tons to 250 tons
Setting up new 150 ton deinking plant ( they can extract more caustic soda from recycled paper and then the same is used for own consumption, caustic soda prices are sky rocketing at the moment , they didn’t buy anything from open market )
Increasing wood pulping capacity from 130 to 300 tons in next 6 months
Once these capacities for pulp are increased don’t have to depend on external pulp sourcing

Strengths

Fully integrated plants
Capitve power Plants
*Captive plants for deinking which extracts caustic soda from the recycle paper
*Plants is based in the agro hub of punjab where agro feedstock (wheat straw and rice straw ) is abundant
Sticky state government education board customers
Access to american player Zume , they have technical know how and they supply machinery to Satia ( Zume also partnered with ABB to improve efficiencies in the machines ( Don’t have to reinvent the wheel )
Advanced equipment helps in producing more tonnage and less usage of resources (water , energy etc… )

Key Growth Levers / Triggers to watch out for

Changing the product mix from tradition products paper to valued added products like cutlery and food packaging products based on bio mass , installed two machines , once these reach to 80% capacity they will setup 6 more machines .
They are awaiting regulator approvals ( may be FSSAI ) to launch these biomass packaging products

Risks

For sure there will be huge demand for the paper based products but the current technologies / equipment are not meant to produce huge quantities (watched few videos, it is not fully automated and very slow rate of production ) . Unless the supplier commits the quantity the customer (likes of swiggy, zomato etc… ) won’t place the big order.
Once biomass consumption goes up then there will be huge demand that will drive the prices (from waste to gold, already husk prices have gone from 40000 a ton to 10000a ton)

Technical Know how

agro pulp we make, it is a good pulp, but it is not equal to the hardwood pulp. So, hardwood is better than agro pulp and softwood is better than hardwood. Softwood is not available in India. So, that softwood pulp10- 15% whatever we need to add to give strength to the paper that will be imported, number 1 and for copier paper we use BCTMP pulp, bleached semi-mechanical pulp. So, these two pulps will always be purchased in small quantities continuously. So, the requirement of waste paper will be just to meet the emergency needs, if there is any breakdown here, only then we will be needing that

Questions

Zume is going to give the machinary for free of charge ? Are there any royalties needs to paid ?
These are long term contracts ? Are they going to tie-up with other players in India ? (Zume already sells bagasse based products in India , Satia products are produced from Wheat straw )

Financials

Average cost of capital is 6.5%

Conclusion

India is net importer of paper, and market is very much fragmented, organized players share is 10% , Fittest will survive, fitness can be achieved by operational efficiencies (captive power, full integrated plant, less dependency on imported pulp etc… ) . This analysis triggered by Yash Pakka ( thanks to @MHS and @hashims who motivated me to pick this up ) who are also into biodegradable products produced using bagasse. This is a very big opportunity, the industry is just evolving, we have to see what kind of challenges industry is going to face when the real ban is implemented. I am more than confident the industry will move away from cyclicality to shallow cyclicality due to surge in ecommerce and singe usage plastic ban.

I will try to post more on top player capacities ( since this is a new product line and my focus is more on the biodegradable products produced by using biomass ) but it is little difficult to do peer to peer comparison.

Rafi_Syed · March 1, 2022, 10:00am

Have ordered some samples from Zume, the quality and strength is top notch

Going to pass it on to a fast food center of my friend who is going to use these and provide the feedback.

vedantinvestor · March 1, 2022, 5:02pm

Great thread @Rafi_Syed!
@kalpesh4430 has shared great insights into Satia in his portfolio thread as well - Kalpesh's Portfolio.

Rafi_Syed · March 1, 2022, 6:17pm

PM: Zume has also tied up with Satia Industries for the supply of patented paper cutlery products — could you tell us more about this association?

VG: Initially, Zume and Satia Industries will deploy more than 2,000 tons of self-sealing, sustainable molded-fiber products to be manufactured and marketed during the first year of the partnership. Satia Industries plans to enhance its expertise and expand its product offering basket through the association by providing customized molded fiber packaging solutions across multiple industries such as food, consumer packaged goods, electronics, cosmetics, healthcare, and pharmaceutical.strong text

Apurva_Dubey · March 4, 2022, 10:21am

Rafi_Syed · March 6, 2022, 1:42pm

Rafi_Syed · March 11, 2022, 3:14pm

Views on Paper Industry by JK Paper

Rafi_Syed · March 14, 2022, 11:53pm

Rafi_Syed · March 14, 2022, 11:55pm

Source

Investor1234 · March 15, 2022, 12:52pm

Can anyone help me understand what % of Satia’s RM is wood pulp compared to waste paper?

Rafi_Syed · March 15, 2022, 2:16pm

DrArvind · March 17, 2022, 9:50pm

25% waste paper pulp.

DrArvind · March 17, 2022, 10:26pm

@Rafi_Syed Any update on FSSAI approval, as it was supposed to come on 17th feb as per management commentary but I didn’t find any announcement related to it on the exchanges.

Rafi_Syed · March 21, 2022, 11:28am

Investor1234 · March 21, 2022, 5:51pm

Satia hasn’t really participated in this rally unlike jk paper, TNPL and others? Any reason why? About 25% of Satia’s RM is waste paper whose prices have increased a lot. Is the waste paper as % of RM for jk paper lower?

Apurva_Dubey · March 31, 2022, 3:34pm

Apurva_Dubey · April 2, 2022, 7:06pm

Ordered food from a restaurant today, it came packaged in Zume boxes. Zume product quality is really good. The box was sturdy and leak proof.

Disc.: invested in Satia industries

Apurva_Dubey · April 9, 2022, 6:52am

Article is behind a pay wall though.