Shreyans Industries Ltd - An efficient Paper manufacturer!

Stock Opportunities Untested - but worth a good look
1

Shreyans Industries is a Punjab based paper manufacturer of writing & printing paper. It has two units which together currently have an installed capacity of 94,000 MT per annum. It uses agro waste such as wheat straw & sarkanda as its primary source of raw material. The Indian per capita paper consumption is only about 13 kgs as against the world average of 57 kgs. This is likely to rise rapidly due to the expected pick up of the education sector, improving literacy levels & increasing number of schools & colleges.

The paper industry is currently in a sweet spot as is reflected in the recent results of most paper Co.'s. This is partly due to the increased pulp prices globally. A falling rupee has further reduced imports drastically.

The Co. has been upgrading its plants on a regular basis, having invested about 25 crs. in 17-18. A similar amount is planned in the current year as well. This is been done from internal accruals. It is debt free on a net basis. In fact, it is sitting on surplus cash currently, having investments in mutual funds of about 61 crs. against combined debt of about 37 crs. as on September 2018. It is an extremely efficient user of capital with a much higher RoCE than the industry average. This continuous plant upgradation has resulted in improving operating margins as is visible from the quarterly numbers.

(in Cr.) Jun-18 Mar-18 Dec-17 Sep-17 Jun-17 FY 17-18
Income Statement
Revenue 123.94 132.77 116.65 107.56 112.74 469.72
Other Income 0.34 0.44 1.60 1.40 1.15 4.59
Total Income 124.28 133.21 118.24 108.96 113.89 474.31
Expenditure -107.48 -115.80 -105.88 -96.24 -101.58 -419.50
Interest -1.23 -1.31 -1.58 -1.36 -1.36 -5.60
PBDT 16.80 17.42 12.36 12.73 12.31 54.81
Depreciation -2.37 -2.28 -2.36 -2.08 -2.07 -8.79
PBT 14.43 15.14 10.00 10.65 10.25 46.03
Tax -4.97 -5.17 -3.23 -3.32 -3.13 -14.85
Net Profit 9.46 9.97 6.77 7.33 7.12 31.18
Equity – 13.83 – – – 13.83
EPS 6.84 7.21 4.90 5.30 5.15 22.56
CEPS – 8.86 – – – 28.91
OPM % 13.56 13.12 10.60 11.83 10.92 11.67
NPM % 7.63 7.51 5.80 6.81 6.31 6.64

The valuations are attractive. The Co. should comfortably do 500 crs. in turnover in the current year with profits of about 35 crs. after paying full taxes. The Co. is available at a market cap of under 215 crs.

Here’s a link to the latest quarterly results.

Concerns: Paper is a commodity & as such Shreyans suffers from all the risks associated with a commodity player, but the paper industry is currently on a roll after many years and good times are expected to last for the foreseeable future.

Disclosure: Invested & looking to add as the story unfolds.

23 Likes
2

Shreyans came out with a superlative set of December qtr numbers, its best ever by a long shot. The upswing in the paper industry is clearly helping most paper companies, but what stands out for Shreyas is efficient use of capital. It is easily the most efficient paper manufacturer going by return ratios. Another positive is its clean balance sheet. It is debt free on a net basis.

The Co.'s strategy of ploughing back a chunk of it profits year after year to upgrade / de-bottleneck its plant is clearly resulting in improving operating margins. March Qtr is usually a good one for Shreyans & based on Q3, one could easily expect the Co. to do about Sales of about 575 Crs in the current year with PAT of about 45 crs. That’s after paying full taxes. The current correction has brought its market cap down to about 190 crs.

Disc: Have been adding in the current correction in small caps.

4 Likes
3

This interview gives good perspective on how the company has grown over the years, their ability to adapt to newer technologies and their willingness to adhere to the environmental norms.

http://papermart.in/2018/03/19/shreyans-industries-ltd-the-indian-paper-industry-to-keep-growing-on-macro-level/

Clearly the company is efficient in its operations however the growth in future seems to be limited. Presently they have 94000 MT capacity and do not have any plans to increase this further as of now. In fact in the above interview, Mr. Anil Kumar has mentioned that they are present in a location which is declared as a dark zone due to water shortage. Although the company has been constantly upgrading technology to reduce their water consumption as per MOE guidelines, getting the permission for further expansion may not be possible. Also, we are not sure whether the company has free land for brownfield expansion.

They have spent money on modernization/ debottlenecking in FY 18 and FY19, benefits of which is clearly visible in the recent numbers. The capacity utilisation was ~86% last year. This may have increased further in the current year along with rising realization and cost reduction measures, leading to better profitability.

Is it fair to assume that this could be near peak of the earnings for the company and next year could be muted? With such great set of numbers, PE expansion should have happened.

Please share your thoughts on earnings growth in future.

6 Likes
4

Yes, very insightful interview indeed. Thanks for sharing it. It shows a very innovative mgt. willing to stretch the boundaries! To successfully challenge established industry norms, that too in a commodity business, takes a different mindset. What is established is that the mgt. is smart & will not diworsify! (As Peter Lynch would put it!). After all, there is substantial growth even after this interview was given, about a year ago. That said, indeed, capacity expansion could potentially be an issue, but what is to stop the Co. to grow inorganically as it has done before. It started out with one plant & later acquired the other one. It could even set a new plant in another wheat growing state, given the wherewithal it has & large amounts of cash surplus when one adds the current years profits as well.

2 Likes
5

A lot of paper companies have been coming out with great nos. I looked at jk paper too. Debt is higher if one compares it to the likes of shreyans. Even seshayee today came out with very good numbers.

The key trigger has been lower pressure due to production disruption in China due to environmental issues. Another factor has been low utilisation of US based pulp by Chinese facilities with the ongoing trade war and hence correction in global prices of pulp. So on one hand the raw material (pulp) prices have corrected and end product (paper ) prices have remained strong.

How long this scenario remains in vogue needs to be seen. These external factors tend to change quickly.

Inspite of such stellar numbers most of the paper companies are not making price moves which are consistent with such stellar results. Even companies like JK paper which are market leaders are quoting at around 5 PE based on expected FY 19 eps. Seshayee which is a respected name in paper industry also quotes at sub 10 PE.

Either markets have misinterpreted these companies or it could be that whatever good and positive had to happen to these paper companies in terms of tailwinds has happened and these could be operating at peak margins and peak demand and going forward there could be some softness in business prospects.

I also feel the whole sector seems undervalued but currently am in watch and wait mode to see how things pan out.

9 Likes
6

The current market mood is such that good results are being ignored somewhat & the not so good results are taking a beating. At least in the small cap space. This scenario has now been prevailing for the last 12-15 months. When the tide turns is anybody’s guess, but the current bear run seems to be the most prolonged in my memory. There have been sharper corrections, but the length of correction has been a surprise. When the smart money comes back is an unknown. I have personally been pretty off the mark when it comes to timing this market, so I try to invest meaningfully in companies with a good balance sheet, that I feel will be around in reasonable shape 3-5 years from now.

2 Likes
7

The following interview with Mr. Harsh Pati Singhania of JK Papers throws valuable insights into the current paper scenario in the country. One interesting take away for me was that paper manufacturers that import pulp are in a more difficult situation when ever the pulp prices harden. At the moment with benign pulp prices & decent realizations, the sector as a whole seems to doing well.

2 Likes
8

The Annual Report for 18-19 is bullish of the paper industry in general & of the Co.'s prospects in the current year. The Dividend has been raised to Rs. 5/- (including a special div of Rs. 3/-). The co. has investments in mutual funds of about 62 crs. The stock with an EPS of Rs. 34/- is available at below its book value of Rs. 143. It has a dividend yield in excess of 3.5% & its return ratios are the best in the industry.

2 Likes
9

@RajeevJ sir… If you are still tracking Shreyans… Can you please throw some light on how are they planning to sustain this growth going forward that we have over the last 3-4 quarters. Base has been high specifically for the last 2 quarters… Is this growth acheivable without impacting the margins? Right now its available below a current PE of 4…

1 Like
10

The promoters have bought 3,77,608 shares from the open market (NSE) on August 6, by investing about 4.15 crs.

https://nseindia.com/products/content/equities/equities/bulk.htm

2 Likes
11

The link is not showing any data.

12

image
image1920Ă—1080 352 KB

13

The market has undervalued this sector a lot for some reason.
PE of 3.5 & PB of 0.8 for this company is random. It has been profitable consistently and is not going bankrupt … Other paper companies like Seshasayee also in same boat … I am picking this stock up on Monday.
Is there any negative news I am missing? I just got this in the screener and read the annual report …

14

This company looks interesting. They have been able to reduce their manufacturing cost consistently, thereby increasing margins. It has also been reducing it’s debt and is generating good returns on capital employed.

But when I look at their related party transaction, I find a few loans given by the company.
(Loan taken by related enterprises, management and relatives of management) - Together, this constitutes 4.36 crores. 4.36 crore loan to promoter and relatives from a company with 45 crores profit. Isn’t this a red flag given the condition that the company is still not debt free?

1 Like
15

Companies like Shreyans & others paying tax at the highest tax slaps are going to be major beneficiaries of the cut in corporate taxes. Further, advance taxes already paid for the year have been paid according to earlier tax rates, so many companies like Shreyans will be paying lesser tax during the balance financial year. This makes Shreyans even more attractive in terms of valuations. It did an EPS of Rs. 34 after paying taxes @ 33% last year.

1 Like
16

The Promoters bought shares from the market today.

Insider trading updates for 2019-09-26

Company Person Person Category Holding pre transaction Num of Shares Value (Lakhs) Transaction type Holding post transaction Mode
SHREYANS INDUSTRIES LTD.-$ LEVINA INVESTMENT & MERCANTILE COMPANY Promoter Group 969409 (7.01) 11156 15.44 Acquisition 980565 (7.09) Market Purchase
4 Likes
17

The Promoters bought another 17,072 shares from the open market today.

Insider trading updates for 2019-09-30

Company Person Person Category Holding pre transaction Num of Shares Value (Lakhs) Transaction type Holding post transaction Mode
SHREYANS INDUSTRIES LTD.-$ LEVINA INVESTMENT & MERCANTILE COMPANY Promoter Group 980565 (7.09) 5000 7.34 Acquisition 985565 (7.13) Market Purchase
SHREYANS INDUSTRIES LTD.-$ JAGVALLABH PARASNATH CAPITAL INVESTMENT § LTD. Promoter Group 1116920 (8.08) 12072 17.67 Acquisition 1128992 (8.17) Market Purchase
1 Like
18

The company despite being Net Debt free has not cooperated with Crisil in past for ratings. That does not reflect good on Corporate Governance part.
https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/Shreyans_Industries_Limited_October_25_2017_RR.html

Although when CRISIL issued a Non Cooperating Ratings , the company has sorted it out later with them and thereafter CRISIL withdrawn the ratings. Currently Care has rated their debts.

Promoter’s Renumeration is around 7.36 Cr on a profit of 47 Cr (Corresponds to 15%). There are some related Party transactions , deposits and interest payments which are not clear to get the insights for the Interest Rate at which they are taken.

Out of the 77 Cr required for CSR Expenditure (61 Lakh for this year + 15 remaining from last) , company has spent 43 lakh. Remaining 34 Lakh is said to be used for constructing charitable Hospital in future.

As per their AR , There are over 750 mills spread across the country. Total installed capacity is estimated at 18 million tonnes. The products are broadly classified as 1. Newsprint, 2 Writing and Printing Paper, 3. Packaging Paper and Board, and 4. Specialty Papers. Shreyans produces Writing and Printing Paper. Writing and Printing Paper accounts for about 35% which means 6.3 Million tonnes capacity. Shreyans present capacity for manufacture of Writing and Printing Paper stands at 94,000 MTs per annum which corresponds to 1.5% share in overall Writing and Printing Business. That is a decent share considering so many players in the market.

It has 2 plants. Production growth was muted for Shreyans Paper plant while Rishabh Paper plant grew around 25% resulting in overall production growth at 10% for the year ended March 2019. Topline growth was mainly due to better realizations driven by high input cost. Higher International pulp prices pushed up the paper prices.

As per the AR , “China, the largest importer of waste paper globally, announced a ban on certain grades of waste paper in July last year which came into force in January 2018. The move led to increased demand for pulp pushing up the global pulp prices. However, pulp prices have softened during last couple of months, which in turn has affected paper prices also”.

It looks as if the OPM Margins are at near peaks and possibly may revert back to average 7-9% from 13-14% in last 2-3 Years. I have No idea about how the Paper Cycle works and have to see how it settles. However cut in corporate tax may help in bottomline if company does not cut the product prices. The paper industry is highly competitive and fragmented in nature with presence of a large number of players in the organized and unorganized sector and threat from imports. Moreover market do not value much to these business due to their commodity nature. Shreyans has no plans of capacity expansion as of now and it will be interesting to see from where the growth comes in future. Inorganic growth can be on cards. We have to also see the effects of digitization in the country. As per their AR , the world market is facing Negative or Zero growth due to digitization. For India , they have emphasized on growth in educational sector but not emphasized on Digitization happening in the country.
Sreyans
Disc: No Positions

5 Likes
19

I am not sure if current development in trade war between US China will affect Shreyans positively or negatively? If pulp prices were down and paper prices were up because of trade war then softening of the trade war could reverse the situation i.e. increase raw material prices and reduce end product prices?
What is the capacity utilization like for this company, if company is running at peak utilization then scope of earnings growth is limited unless some capex is coming on line.

Great return ratios, free cash flows, promoter buying, cheap valuations…this company checks out a lot of boxes but key is to figure out whether current situation is sustainable or is it a temporary peak?

Initial exploration, no investments.

21

This seems to be an interesting stock.Anyone else who is following this stock.The valuations are pretty cheap right now.