Seshasayee papers ltd

[jvpatel87]

Seshasayee Papers ltd

The Industry:

4 Categories of Paper :

1. Newsprint
2. Writing and print papers(32% market)
   Poor growth can be expected in future with increase in digitalization and online activities
3. Paper boards for packing(55%)
   Increase in growth can be expected in future
4. Tissue papers(8-10%) and other speciality papers(3%)

Present per capita consumption :
India = 13 kg (Expected to increase to 17kg by 2025)
World = 67 kg

The business:

Main Product in seshasayee : 100% revenue is from business of writing and printing paper

Units :

1. Erode unit : (2018 data)
   • Produced 121594 tonnes in 2018 as compared to 125662 tonnes in 2017
   • Export = 11.88%
   • Produced 23.9 Cr worth petroleum products
   • Produced 510 tonnes notebooks
   • Left over 16 tonnes
2. Tirunelveli unit :
   • Produced 66609 tonnes in 2018 as compared to 69751 tonnes in 2017
   • Export = 21.7%
   • Zero stock left over

SUBSIDIARIES:

Esvi International Ltd :
• 100% holding
• Deals in properties
• Net profit in 2018 : 0.07 Cr

ASSOCIATES:

Ponni Sugars ltd :
• Invested 19.6 Cr
• Net profit in 2018 : 3.34 Cr

Equity shares:

Authorised shares = 4 Crores
Cumulative redeemable preference shares = 3 Crores
Issued shares = 12613628.There is high probability of issuing bonus shares.However,bonus shares have there own pros and cons.

Financial analysis

Sales:

Sales is very irregular.increased from 437Cr(2008) to 1105Cr(2018).Since 3 yrs there is poor growth in sales(1%-8%-0%).

OPM:

Opm has been 19% and is improving.

Tax rate:

The tax rate at around the 28-30%.

Other income:

Company has about 7% of its revenue as other income.Its primarily from interest and dividends.
It has term deposit of 118.8 Cr.It has equity investment of108.37 Cr

Cash flow from operations:

CFO is 848 Cr.Capex is 984 Cr.Free cash flow is about -136 Cr.

Some ratio analysis

Asset turnover:

has decreased to 1.65,which means company is making poor use of its fixed assets.

Receivable days:

is around 35 recently,gradually reduced over years.

Inventory turnover ratio:

is 7.71(reduced).

ROE and ROCE:

is average around 19% and 16% respectively.It has reduced in 2018 to minor extent.

Cumulative Net profit/CFO:

= 473.93/847.91, which means company is able to nicely convert its profit into cash.

SSGR:

is 14% which says company can continue its operations without and external capital.

Networth:

Companies net worth has improved from 12.43 Cr to 725.47 Cr in 10 years.

Trade Receivables(106.86 Cr) is lesser than trade payables(236.46 Cr)

Cash :

24.63 Cr

Dividends :

15 Rs in 2018.Gradually increasing.

D/E : 0.2

Risks :

• Change in RM prices(wood/coal/oil/chemicals)-They have tried pulp farming by providing seeds to farmers at subsidy.Thus,they can get wood pulp at efficient cost and manner.
• Monsoon-Water is required largely in paper industry.Rivers near units are usually dry in summer and off rain.
• Competition
• Capital intensive business

At current price of 900Rs per share,you get per share following -
• eps=100Rs
• Dividend=15Rs
• Equity inv=100Rs
• Term Deposit-100Rs
• Cash and equivalent=25Rs

Management analysis

Salary :

1% of net profit

Shareholders:

Couldn’t find any controversy and frauds.

Expansion plan :
2 projects :

1. Mill development plan 2 @ Erode unit :
   • Completed at 75Cr cost
   • Produce pulp
   • 1.45L tonne capacity
   • 50Cr cost work is under progress
2. Mill development plan @ Tirunelveli unit :
   • Completed @ 75 Cr cost

Conclusion:

Overall company is good till there is good rain,less and easily available RM.Since last year’s Q3 paper industry in India has got favourable environment and thus profits n growth can be seen ahead.Its 18q1 result is good and expected to see growth in further quarters.Big asset companies like LIC has invested in seshasayee papers.However,paper industry has lot of competition.

(Note:final conclusion of this being good or bad investment should be based on your own analysis.
Disclosure:8% of my PF)

[pratikchandak]

@jvpatel87

Writing and print papers(32% market)

Are you sure they have they have 32% market share? Even JK Paper has 24% market share in writing and printing paper.

Margins have improved tremendously from 2017… I guess this is contributed to reduced cost of RM… also, they are on expansion mode… looks good in first look… could you throw some light on management side?

[jvpatel87]

*I want to say that out of total paper produced in INDUSTRY(not seshasayee), 32% is consumed in printing and writing type of paper.
*Seshasayee has 100% revenue from writing and printing paper only.They don’t make other category of paper.
*No frauds found against management till now.There salary is <1% of net profit.There salary is as per ceiling act.

[kush_gangar]

Seshashayee Paper and Board Ltd. AGM 21/07/2018.

• Production is not affected in current year as there is no shortage of water.

• Raw material (wood) is available at cheaper rate compared to last year because supply is in excess of demand .

• Current Paper Capacity at Erode is 125000tonnes p.a. and at Thirunelveli it is 90000tonnes p.a.( 60000tonnes in FY 16-17)

• Pulp capacity at Erode is 1,46,000tonnes.

• Paper prices have been increased by 12% to 15% and are still going upwards.

• imports of paper has been reduced because of Rupee Depreciation. Now imported paper in premium segment is costlier by Rs1800 to Rs2000 per tonn as compared to Indian paper.

• Printing paper will grow at around 7% and Packaging at 12%.

• Company is not planning for further expansion at current locations. It is exploring inorganic acquisition with good asset quality for further capacity enhancement.

• Many paper mills which does not have integrated pulp production are facing tough time as pulp prices are at higher level. Many small companies have approached NCLT.

• Central Govt. is keen on imposing anti dumping duty on paper. As per his view It might take 3 to 6 months. Govt is also considering the same for waste paper.

• Company is targeting to produce 215tonnes for FY 18-19 which means full capacity utilisation. Selling average peice will be at Rs. 67 to 69.

• Major reasons for sustainable growth in paper industry are E commerce Boom, Plastic Ban and increased focus in Education.

Threats

1. Water charges by state govt is increased by 40times which means company will have increase in power and fuel expense of Rs.20crores in current financial year.

2. Sterlite’s Furnace oil plant is shut down which has resulted an increase in furnace oil cost by 50%.

• 1st August will be celebrated as Paper Day. All paper associations are working together on it.

[bajji_s]

Seshasayee Paper to invest INR 315 Cr. for Capacity Enhancement Under Mill Development Plan –III

Despite predictions that the on-going digital revolution would make paper obsolete, paper remains central to our lives. Paper is interwoven with human life in innumerable ways. Think of the hundreds of times, we touch paper, every day. Paper is a bio-degradable product with a benign footprint, at the end of its life cycle, and this adds further strength to this product, promoting its growing usage,” Said by N Gopalaratnam ( In above picture ), Chairman of Seshasayee Paper and Boards Limited, in Annual reports of FY 2018-19.

Mr. Gopalaratnam further seems hopeful about the growth of the Indian Paper Industry, as Indian Paper Manufacturers Association had estimated the annual growth rate to be 6.82% and has projected per capita paper consumption to reach 17 kgs in the year 2025. By keeping this in mind, Seshasayee Paper has planned to spend CAPEX of INR 315 Crore to expand the production capacity and other modifications in its Erode unit.

The Company has completed Phase - I of the Mill Development Plan II (MDP - II) in the year 2017-18, at a cost of INR 75 crores in Erode unit. Phase - II of MDP - II, with an estimated project cost of Rs. 50 crores, is nearing completion. The successful implementation of MDP - II has helped the Company to increase the Production of Paper to 1,32,000 tpa and the production of Unbleached Wood Pulp to 1 45 000 tonnes per annum, in Erode.

“In order to further increase the production of Paper and Pulp in Erode unit, the Company has drawn up Mill Development Plan - III (MDP - III) at an estimated cost of Rs. 315 crores. The implementation period of this project is estimated at 9 months to 21 months and is expected to be completed in phases.

The Techno Feasibility Study of the project has been completed and the Board of Directors of the Company, after detailed appraisal and review of the Project report, have approved the Project. The work on the Project has since commenced in the Financial Year 2019-20,” Report says.

The MDP-III at Erode unit will consist of Upgradation and Modernisation of the Paper Machines to increase the capacity from 1,32,000 tonnes per annum to 1,65,000 tonnes per annum. Upgradation and Modernisation of the RDH Pulp Mill to increase the capacity to 1,54,000 tonnes per annum, Upgradation of the Recovery Island and augmentation of Waste Water Treatment Plant.

Unit : Tirunelveli

Mill Expansion Plan in Tirunelveli unit, undertaken at a cost of INR 75 Crores, is nearing completion.

Film Press and Top Wire Former were installed in the Paper Machine to help in improving the quality of paper as well as stepping up production. Re-commissioned De-Inking Plant helps us to step up pulp production and reduce the use of expensive imported pulp. The re-build of Power Boiler has also been completed to generate additional power. Waste Water Treatment Plant has been augmented to handle higher Wetlap Pulp Product.

“Considering that the Paper Industry is expected to grow at a CAGR of 5 - 6 % over the next few years and considering the demand-supply gap, that is currently prevailing in India for high-quality paper, to continue, Company is actively pursuing both Organic and Inorganic Growth opportunities. CURRENT YEAR (2019-20),” Report says.

Source: Thepulpandpapertimes

For the last 3 years, they are continually going for expansion which is a good sign. Their major issue of Water scarcity seems a distant past since it has not been affected this year as well as last due to copious water in Cauvery. The plant located at Erode was shutdown in 2017

[onlish2014]

SPBL is a integrated paper manufacturer producing printing and writing paper and has its plant in two locations, one unit at Erode and another unit at Tirunelveli with an aggregate capacity to produce 210000 tonnes of paper, per annum. Incorporated in 1960, SPBL has a well established track record of close to 6 decades and commands a good reputation in Southern India. Company is run by professional and very experienced management and has delivered decent growth through both organic and inorganic means. Performance in last 5 years has been solid with major improvement in margins, cash generation and debt reduction.

Company has over 300 Cr of Cash & Bank balances (FY19) and at market cap of ~820Cr. is available at 0.7x Sales and less than 4 Price to Cash (CFO) ratio.

Financials (Annual Report FY20):

Sales	₹ 1,326.00	Previous Sales	₹ 1,105.00	Operating Income	₹ 296.00	Depreciation	₹ 34.00	Tax Rate	26.00%	Number of Shares	6.31
Equity	₹ 867.76	Debt	₹ 96.93	Cost of Debt	10.10%	Cash	₹ 64.74	Cash Equivalents	₹ 246.76	Non-operating Assets	₹ 50.00

Historic performance (screener):

CMP Rs.	P/E	Mar Cap Rs.Cr.	Qtr Profit Var %	Qtr Sales Var %	CMP / BV	ROE %	ROE 3Yr %	ROCE 3Yr %	Annual Free Cash Flow 3Yrs Rs.Cr.	Profit Var 3Yrs %	Sales Var 3Yrs %	OPM Qtr %	OPM Prev Qtr %	OPM PY Qtr %	Sales Rs.Cr.	Debt / Eq	Interest coverage	Mcap to Sales
139	4.6	879	(13.9)	(19.5)	1.0	24.2	22.7	27.0	583.3	74.8	9.6	23.8	24.1	23.5	1,228.4	0.0	31.0	0.7

Valuation:
My DCF calculations (thanks to @dineshssairam for his stock valuation model!) at 15% hurdle (discounting) rate lead to fair value of Rs 250 and most pessimistic case value of Rs. 208 even assuming FY21 Sales of 560 Cr only due to potential extended COVID-19 lock down and lower realizations leading to estimated EBITDA of 0.

Hence, I believe company is a screaming value buy at CMP.

Looking forward to receive your feedback, critique and questions.
@jvpatel87 @pratikchandak

Disc.: novice investor; invested and accumulating

[jamit05]

Hi,

The paper industry has good FcF flow, but I believe its Related Party Transactions are looked into. Seshasayee Papers has admitted in its recent AR that it has given 60L as short term loan.

After reading this, I realized beyond the good numbers, RPT must be looked into.

[onlish2014]

Hi @jamit05,
The current related party transactions are very small and limited for SPBL.
The biggest line item is purchase of Bagasse from Ponni Sugars under a long term agreement at around 19cr per year. Everything else is miniscule in comparison to Sales (~1300cr) or even Pat (~190cr).

Their disclosing of these RPT despite they being not ‘material’ is a sign of good faith on their part. As per my limited understanding of India AS and Companies act RPT exceeding 10% of annual consolidated sales are considered material and must be disclosed. Please correct me if wrong.

However, before FY16 there indeed were some potential red flags - see what I could dig out below.

On the 60 laks inter-corporate short term loan, good news is that the ticket size is much smaller than what it used to be in past. Bad news is that they had to write off 7.6Cr inter-company loan in FY17 (refer AR FY18 snapshot below). I could not find the reasons why.

I however see that they extended 7Cr. loan to High Energy Batteries listed group company) in FY16 for working capital needs.

Strangely, HEB later uses to buy Ponni Sugar stock from market which I suspect was around Nov 2015 (280k x ~200Rs = 5.6Cr). Remainder was returned to SPBL.

Finally the 5cr long term inter company loan that is still carried on the books seems to have originated in FY12 when company acquired Subburaj (SPB). No idea when is due back and at what terms.

All other RPT are mostly limited to dividend payments to/from associates commensurate with listed stock holding.

Also KMP still had significant room to increase their remuneration but after major increase in FY 18, they took no increments in FY19. IMHO, they could have first easily used this channel to extract 60 laks if intention was really to milk the company at expense of shareholders.

However, I will send questions to their IR. Thanks for flagging out!

[divygupta]

Incidentally I was also looking at Seshasayee and went through the AR… while the business looks attractive from valuation perspective, there were few points of concerns/doubts that I had:

1. The company is being run by the management which is like 70-75 years old, and didnt see any visibility on the next line of people who might take up the business once the founders leave the business

2. Compared to SPL, JK Papers is building efforts in building a brand of sorts in the paper industry (went through their AR as well) to see the brand building exercise as well as the sourcing optimisation which has now led to 96% of pupl being sourced from within 200 kms range of the factories, whereas couldn’t find any such info about SPL on their sourcing; for SPL however found a lot of cost optimisation stuff being done by them which is a good thing

havent decided to buy or not, but found JK to be a much better play vs SPL, however SPL has valuations on its side, when I was looking at it CMP was 90 and it was available at less than 2 P/E post reduction of cash and investments value

[jamit05]

SPL is better on two fronts…

Better fund Management, as per the AR it ended 2018-19 with nil inventory. This is also reflected in higher RoCE.

SPL is also doing Capex, and with it’s optimal fund management and low volumes base, there is plenty of room for growth.

Management appears ethical, margins and Fcf is good.

But what worries me about this sector is that currently times are good, EPS is rising, it will be followed by bad times of couple of years. After which we will know which stock is deserving of investment. In good times, everything appears good.

[Abhishek16]

I believe in the short to medium term, because of this present lockdown, paper industry is going to be affected severely. In such scenarios, it is better to invest in companies with little or no debt on their books. In this regard, SPL is better than JK Paper, as it has almost no debt. Valuation wise, I don’t see much difference between the two, in fact JK looks marginally better.

However, in my area, JK Paper has a solid brand reputation. I am a teacher and I know this, in every photo copy shop, stationary shops, JK copiers are almost ubiquitous. And this is despite, their products are costly as compared to competition, which also gets reflected in their high operating margin.

[onlish2014]

@divygupta

The company is being run by the management which is like 70-75 years old, and didnt see any visibility on the next line of people who might take up the business once the founders leave the business

@divygupta: as to the above I share your concern. However, I did some digging:

1. You can find a list of their leadership team here: http://www.spbltd.com/key.htm
2. Very few of above are active on linkedin. However, the couple I could find have solid professional and academic credentials. I don’t think Paper is a ‘sexy’ industry than attracts shiny recruits from IIT/IIM/NITs anymore nor can these companies afford them. So they depend upon more of home grown and stewed talent and seems they have enough in the 50-60 age group to draw from for board positions.

Mr. AK Mehrotra, President Technical Eorde unit: BTech HBTI Kanpur (as renowned as IITs in 1980s), worked at L&T and at Pindo Deli Pulp & Paper Mills PT Indonesia.
https://www.linkedin.com/in/alok-mehrotra-99702523/

Mr. Srinivasan AS, SVP Technical: studied at Roorkee University (now IIT Roorkee) and Norway, worked at Grasim and Horizon Pulp & Paper Estonia
https://www.linkedin.com/in/srinivasan-as-a731a248/

[onlish2014]

@Abhishek16

because of this present lockdown, paper industry is going to be affected severely

@Abhishek16: agree but every industry and company is. SPBL’s mainstay is writing and printing paper (WPP) from what I gather. Newspapers are still being printed. Exams, schools (books, stationary), cash-memos, photo-copier shops, etc. are on hiatus but will resume at some point and underlying demand is there to stay. Most of these are almost ‘essentials’ and neither discretionary nor high ticket price items that will be shunned in a looming recession. Students are staying home but still many receiving assignments and homework ‘virtually’. A relative of mine who is in books and stationary business receives a dozen calls a days requesting if one could come to his home to pickup a notebook, register, etc.

Also, they re-opened the Erode unit on April 13 after seeking special order from district collector. Running on skeletal basis (but indicates they have demand to fulfill). Also pursuing same for Tirunelveli unit.
https://www.bseindia.com/xml-data/corpfiling/AttachLive/ca415790-6ab3-4b4e-9043-0ac705f8b458.pdf

@Abhishek16

JK Paper has a solid brand reputation

Absolutely. They have built a good brand esp. in North India aided by halo effect of JK Group / Singhania family - JK Tyres, JK Lakshmi Cement, Raymonds, etc. However, SPBL’s playing field is South India. Question is what is SPBL’s reputation vs. JK in South? I don’t know and would love if someone from there could comment.

I haven’t studied JK Paper and you may be right that it is better than SPBL in all dimensions incl. valuations. But SPBL beats JK hands down on ROCE, Asset Turnover and Net Cash Flow (last 10 yrs cumulative at ~250Cr SPBL vs ~0 for JK). Also, SPBL always maintained positive Net Profit for past 10 years vs. JK who had losses FY 15 & 16.

@jamit05

As per the AR it ended 2018-19 with nil inventory

Actually they claim to have achieved zero closing stock 21 times in past 25 years! Last few years track record:

[onlish2014]

Pretty decent set of numbers by SPBL and better than my estimates for Q4 20:

Q4 results_mar_20.pdf (3.4 MB)

Some highlights:

• Debt reduction continued - 85 Cr ‘decrease of non-current borrowing’. This should extinguish all outstanding debt. Need to await AR 20 to validate.
• Dividend increased to 25Cr (from 22 Cr in FY19) - shows healthy liquidity despite debt reduction and higher CAPEX charge (46 Cr vs 30 Cr)
• 60 laks inter-corporate short term loan has been repaid and collected from related party
• Overall Cash + Cash Eq. + Bank deposit increased to 325Cr from 310Cr. This provides company with a substantial war chest and can allow for acquisition of distressed assets should smaller paper mills become unviable due to current economic situation.

Also enclosed COVID Impact notified to exchanges. Commentary is cautious (as always ) but good to note Tirunelveli unit also opened on Apr 27. The bigger unit at Erode has been up since Apr 13 (after closure on Mar 24) and is working at scale without issues.

On the flip side, their ‘zero stock’ for 21 years record is probably broken as inventory is building up due to subdued sales in metro hot spots
COVID impact_BSE.PDF (1.9 MB)

On the valuation front, my estimate of fair value has increased from 250 to 264. Meanwhile stock gained about 10% since my post on Apr 13.

Looking fwd to AR 20!

[onlish2014]

Here’s the response from the company on RPT questions I had posed. They also apologized for the close to 3 months delay in responding due to COVID and some email server error. I had given up hope

1. On what terms was the inter corporate loan of 0.60 Cr. extended to SPB Projects and Consultancy Limited (SPB-PC) in FY19?

The Inter Corporate Loan was extended only as a Short Term Loan to SPB-PC, at arm’s length terms, with rates of interest higher than the borrowing rates of the Company. The loan, along with interest, has since been repaid by SPB-PC in FY 2019-20.

2. Why was this loan required given that SPB Projects and Consultancy Limited earns decent revenue on consultancy from SPBL as well as other paper mills?

This Short Term Loan was extended to SPB Projects and Consultancy Limited, towards their Working Capital Requirement.

3. What is the status of the outstanding loan and interest paid?

As clarified in reply to Query No. 1, this loan has already been repaid by SPB-PC along with interest due.

4. As per FY18 Annual report, inter corporate loans worth 7.60 Cr. had to be written off as doubtful debts. Why and due to which subsidiary / associate?

The Company had extended Inter Corporate Loans to Subburaj Group as part of our acquisition of M/s Subburaj Papers Private Limited (SPPL) in FY 2011-12, to facilitate the promoter of SPPL to discharge his obligations to the Banks.

This loan turned in to bad debt subsequently with the total failure of the business done by M/s Subburaj Group.

5. Our company extended 7.01 Cr. loan to High Energy Batteries Ltd in FY16 (please refer to screenshot from FY16 Annual Report). What were the terms of the loan and why did HEB use the loan given for working capital to instead buy shares of Ponni Sugars?

HEB, a Group Company in which our Company has significant holdings, requested for an Inter Corporate Loan to tide over their immediate Working Capital Gap to execute substantial orders released by the Defence Departments. HEB had utilised the Inter Corporate Loan, given by SPB, for their Working Capital purposes only.

As noted in the disclosure in the FY 1516 Annual Report (also noted in your query), HEB, during that year, had sold their shareholdings (2,80,000 shares) in Ponni (Sugars) Erode Limited and with the proceeds, repaid portion of the Inter Corporate Loan back to SPB.

[jamit05]

Hi… I am indebted to you for sharing this sensitive info.
The tendency for the management to do RPT is an issue, not favouring minority investors. It also resulted in a sizable bad debt.

Ty.

[rahulchauhan007]

Intrsting take on Seshasayee Paper by the article.

Seshasayee Paper & Boards Ltd - Paper Giant in Making? - FinMedium

The only clarity I am looking forward is on the real impact in terms % of school & colleges not open.
As it really does not seem that educational institutions would be open any time soon.

Disc : Invested.

[DEnotDB]

December shareholding shows that LIC is completely out of the stock, as DIIs own almost nothing. FII holding up marginally. Interesting stock, just incase the theme of domestic manufacturing businesses see entry of paper manufacturers again. Sure this is a cyclical business, witnessing weak demand post -covid, but trading at reasonable vals on reasonable profitability assumptions. Certainly cannot be a high conviction pick, but can be part of a large basket… because when cyclicals move, they really move.

[Neo_fundamentalist]

Starting to research on this company in detail?

However keeping in mind, the paper sector in india under pressure due to cyclical nature of the business/ cheap import/ digitalization, am concerned on the long term outlook.

Newsprint papers surely growth is affected, however packaging paper and other household paper needs (tissue papers etc) have a good outlook.

While going through some of the company details, it seems the company is into only newsprint papers as their primary product. Any idea if they are diversying to serve other verticals in this sector. The current expansion project, will it diversify their product profortio ? Pls advice.

Thanks

[DEnotDB]

To the contrary, newsprint is small. Their strength is infact a large product range. They have used a lot of 2020 for expansion and upradation capex. It continues. Cash came off from 300crs as they built large finished goods inventory as that would facilitate planned shutdowns for capex work. So please keep in mind that 900crs mcap will again have 300crs cash, of which a majority will go into capex.

Q1/Q2 annualized ebitda is 120crs, which is only 10% of gross block. This 10% is below the past 15 years median of 15% of gross block for Seshayee and the sector. Recent years were high at 20%.

In 2 years Seshayee’s gross block would be ~1500crs and at 15% yield, the ebitda could be ~225crs. This implies 4x ebitda (assuming mcap as ev, even though likely to have some cash). This assumption of 15% ebitda/gross block is below long-term median, while the current govt stance of supporting domestic production should imply a higher no.

In commodities, it is tough to predict so at decent px and b/s, just buy and sit tight.