Sree Sakthi Paper Ltd

Stock Opportunities
1

Nov 11. Stock idea put up by Hitesh,hitstocks.blogspot.com

SREE SAKTHI PAPER LTD.Bse code 532701

CMP 26-27MARKET CAP 42 CRORESBOOK VALUE AROUND 22

PROMOTER HOLDING AROUND 52%, NO PLEDGING.

PRODUCTS

The company is involved in manufacture of paper and paper boards . It is the largest kraft paper producer in south India.Capacity is 1 lac ton per annum.

Its corrugation division converts 300 MT of paper into corrugated cartons annually which is used as packaging material by the liquor, tea, cashew, sea food, latex, rubber industries.

FY 10 PROGRESS AND RESULTS

During FY 10, the production increased from 68692 MT to 71926 MT and capacity utilisation increased from 81 to 85%.During FY 10, expansioncum modernisation plan resulted in manufacture of high quality paper at its duplex board unit to cater to the needs to high end segment.The debtor days reduced from 58 in FY 09 TO 49 in FY 10..EBIDTA margin improved from9.1 to 11.1 and NET PROFIT MARGIN improved from 2.4 to 3.3. During FY 10, debt has been brought down from 32 to 29 crores. As on Sep 2010 it was around 30.6 crores.

EXPANSION/MODERNISATION

Its Kraft paper Unit I has been modernised and capacity upgraded to 80 tpd by adding more dryers and installing second wire. Installation of second wire at Kraft paper unit Iwas completed in July 2010 and Third Wire at Kraft Paper Unit II was installed in October 2010 and hence full benefits will be felt in Dec qtr results and beyond.These measures will help the company to address the demand of high end segment which has a huge demand.

CAPTIVE POWER PLANT is being set up by the company with 25 ton High pressure boiler and 2 MW back pressure turbine. Boiler and back pressure turbine are slated to be operational by end of this fiscal.This is a part of captivepower generation which will cater to the steam requirement and will meet 30-40% of power requirement of the company.

CARBON CREDITS-- The companyâs project titled METHANE RECOVERY FROM WASTE WATER generated at Paper manufacturing unit in Kerala was recognised under CDM of UNFCCin Oct 09 and the estimated emission reduction will be around 3923 metric tones of CO2.The project is in progress and is likely to earn income from carbon credits as and when the formalities are completed.

HYDROPOWER PROJECTS-- The company is involved in setting up three small Hydropower projects in collobaration with the govt of Kerala.

RESULTS

YEAR

MAR 06

MAR 07

MAR 08

MAR 09

MAR 10

HY SEP 10

SALES

64

68

116

144

147

87

NP

1.7

2

3.02

3.3

4.64

3.5

EPS

1.04

1.22

1.84

2.02

2.83

2.13*

Sep 2010 half yearly EPS is not annualised.For full year if company manages to achieve EPS of 4 or higher, dividend is expected to go up also and dividend yield which is currently very attractive will be even more so.

INVESTMENT THEME:

The company is slated to complete most of its expansion projects during FY 2010-2011 and some of the benefits of sales and profit growth can be seen in the results of first half of FY 11.The second half is also likely to be equally good for the company.Full impact of expansion and modernisation will be felt during FY 12.Hence company is currently at an inflection point.

DIVIDEND

Company had declared Dividend of Rs 1 for fy 07, 1.5 for FY 08,1.5 for FY 09 and Rs 1.8 per share during FY 10 (which included two interim dividends of 90 paise each).At current market price of around 26-27, the dividend yield turns out to be around 7%which provides a good margin of safety to the investors.There is a board meeting on Nov 22 to consider interim dividend for FY 11. I expect the total dividend payout for FY 11 to increase in line with increase in profits.


--
hitstocks.blogspot.com

2

Sounds good. 2 observations:

1). We were discussing JK Paper yesterday Ayush & me. JK paper for copier machines is like defacto standard throughout the country. It has better operating (20%) and net margins (7%) and returns (17% RoCE) than Sree, much larger and well know quotes still at ~5PE TTM (it has higher debt at 1.42x equity) with BV per share 60 (CMP 70).

Ayush made a point - paper sector has never really caught the fancy of investors!

2). To do an apple to apple comparison we should check out other kraft paper manufacturers. Who are they. Who is the largest in India, South India?

3

Hi

The basic premise of investing in Sree Sakthi is its attractive dividend yield and dividend payout ratio. The management has been doling out dividends since almost 4 years to the best of my knowledge and I believe that they will continue to do so for the foreseeable future also. Plus based on first half results company is likely to surpass EPS of around 4 for the full year because of benefits of expansion/modernisation kicking in with their full impact in next two quarters. So hypothetically dividend should rise and if it makes it to around Rs 2.5 per share then we have a stock with a 10% dividend yield which by all paramters is very attractive.

Regarding JK Paper I had earlier studied it also but got turned off by huge debt. Plus I think as mentioned by you earlier, we need to compare Sree with other kraft paper manufacturers. The expansion is aimed at garnering more market share in the high end kraft paper according to their latest AR and this should help in improving margins. The management has indicated that the demand in this high end paper market is huge.

Here Sree is a story which according to me is unfolding, relatively less discovered and in a bit of niche in the paper sector, and hence might command better valuation.

4

If they maintain Rs.1.8, Dividend yield is ~7% yes. Its high because the payout (DPS/EPS) is also very high. What is the dividend policy?

Sree Sakti Paper Mills FY10 FY09 FY08 FY07 FY06
Dividend Snapshot
Equity Dividend (Rs.Cr.) 2.96 2.46 2.46 1.64 0.82
Dividend per share (Rs.) 1.80 1.50 1.50 1.00 0.50
Dividend Payout (%) 63.66% 74.32% 81.46% 82.00% 47.95%

Also company seems to be getting more efficient with scale, esp at working capital management -good signs as debtor and inventory days trend significantly lower.

Sree Sakti Paper Mills FY10 FY09 FY08 FY07 FY06
Financial Health Snapshot
Financial Leverage (x) 1.81 1.93 1.75 1.59 1.31
Debt to Assets (x) 0.75 0.82 0.71 0.60 0.38
Debt to Equity (x) 0.81 0.93 0.75 0.59 0.31
Interest Coverage (x) 2.37 2.04 2.05 2.64 2.09
Current Ratio (x) 1.63 1.67 1.67 1.75 2.51
Quick Ratio (x) 1.22 1.25 1.34 1.46 2.23
Cash/Total Assets (%) 4.87% 4.19% 5.63% 17.72% 38.39%
Debtor days 49 58 68 82 84
Inventory Days 35 39 35 47 37
5

Why not look at Ultramarine & Pigments for Dividend Yield?? Its better on most metrics.

6

Dividend Yield here is seen mostly as the downside protection.With yield being similar, how is the growth visibility? and track record?

If you have dug around Ultramarine, and know something of the business, please start a thread on it under this same Untested…forum.

-Donald

7

**Ultramarine also looks attractive based on dividend yield. Regarding growth from its products I think surfactant could witness growth going forward. Sep quarter has been very good for the company with profits of around 6 crores. **

One point of concern is raw material price rise which I think is mostly linked to crude prices.

Coming to Sree Sakthi, looking at the first two quarters and management speak in the AR, and the Sep results press release, next two quarters are likely to be even better, so dividend yield might increase even more making this one even more attractive.

Having said that, I think Ultramarine also looks worth investigating. I tried getting hold of the AR from their website but couldn’t locate it on their website.

8

Ultramarine & Pigments AR is available at BSE plus site. Pls look under the Filing & other Info section.

1 Like
9

Hi, Hitesh and Donald,

This stock looks like a good find based on dividend yeild alone.

There are two more triggers forhigher growth - shifting from VAT to GST and operation of the Kochi Internation Terminal which will decrease the RM cost considerably as per the management.The shipping termialshould get commissioned by end of next year.

The group website (sree kailas group)was not that impressive. The group is into Logistics, (based at Chennai) which seems to be quitegood,and Real estate (a handful residential and commercial projects in Kerala).

The client list of SSPML is fantastic - HUL, ITC, UB… Who will be the end users of the new premium kraft paper and what is that market size? Are there potential issues due to the factory being located in Kerala - higher wages, labour issues?

Regards

Vinod

CMP 26-27MARKET CAP 42 CRORESBOOK India.Capacity

hitstocks.blogspot.com Link: http://hitstocks.blogspot.com/

10

Hi, just to add to the below…I spoke to a friend of mine who owns a paper mill in Pune.

They had considered buying paper from SSPML, but the VAT-CST issue made them chose local suppliers. He feels that profit of paper mills operating in Kerala will increase once the GST is implemented as they can tap the rest-of-India market much better (Majority of the market for Kraft paper is outside Kerala). The tax should come down by 2%.

According to him there is 90% mechanisation in this industry and labour problems wont be an issue.

The transshipment terminal at Kochi port is a great advantage for SSPML with regards to RM imports.

Regards

Vinod

11

Thanks Vinod.

Reading the AR gives you a good feel about the company and management. I liked this focus on operational efficiency

“The operational efficiency of the company also improvedby way of better working capital management, which wasreflected by shorter debtor turnaround time, vastimprovement in cash flows, significant rise in net cashgeneration and significant reduction of working capitalborrowings despite higher turnover in FY 2009-10.”

The downsides are pretty limited, while prospects are good, and valuations are compelling considering the dividend yield.

12

Thanks Vinod for putting in more details to the story. I did not know about the transshipment terminal and its advantages. Today I looked at the results of a so called multibagger stock recommended by someone on the long term investors website and sep quarter results are poor and barring the june quarter, earlier quarter also are a mess. The consistency results of SSPML is appealing to me.

13

Forgot to mention the name of the company which is Ruchira Papers.

14

Hitesh,

Some observation:

1. over last 5 years, BV/share has remained at the same levels.

22.23 21.48 21.22 21.14 21.09

While equity capital is unchanged, Reserves & Surplus have seen pathetic additions.

20.11 18.88 18.45 18.31 18.23

Only last year there is a 1Cr plus;

No retained earnings, all given away in dividends?? if you recall dividend payout ratio (DPS/EPS) was 70-80% plus; why would a company do this?? Capex requirements have been low 4-8 crs

2. Otherwise the company seems on track -expansions completed, higher-margins value additions, increased cash flows, reduced working capital borrowings and the icing -dividend yield; downsides pretty limited

just cant reconcile the retained earnings/dividend policy?

15

Hi Donald,

As you say it is mostly to do with paying out most of the earnings as dividends. One can argue that the company knows nothing better to do with its earnings than give dividends and this in Lynch’s views, does not make for good growth for the company. To the management’s credit, they have done most of the expansion without undue stretching of the balance sheet. On the flip side, they could have gone for buy backs which would have added more value rather than only plain dividend payment. But I like whatever they have done because although it does not show management as very dashing people, it certainly shows them as level headed guys. And they seem to be delivering whatever they are promising. And dividend is a big protection on the downside as has been seen in the last two three sessions mayhem where this stock has not taken any punishment at all. I think one can consider it as a debt fund but with some upside potential and can act as a good hedge against market corrections. But it might not outperform in upward trending markets.

16

Hi Hitesh,

Thanks for bringing the stock to notice. It looks good to me.

The buy-back option is not practical for such a small company as the related costs are high and hence money will get wasted. The amount should be higher as a lot of statutory obligations are necessary.

Regards,

Ayush

17

Interim dividend declared at 80 paise per share today.

18

Thanks for a good one again HItesh.

Even this is ~6% dividend yield, if they announce another interim at same levels. besides the business has good growth visibility

19

The group has a Waste paper trading division, Sree Giri packagings Ltd. This division established with the object of backward integration (as mentioned in their website). This might mean Sree Sakthi paper mills has an advantage over peers??

Largest waste paper collection in india .
* This division established with the object of backward integration
* Collection and bailing centers at all major cities in South India
* Presently handling 100,000 MT per annum.
* Expertise handling brown grades

http://www.sreekailas.com/Waste_Paper_Trading.php

AlsoThe 2010 AR mentions very clearly in the Management speak -investor queries section. Those who haven't read the AR may find it very interesting to read this section, as it throws several insights into sustainability of the company's growth.

How is the situation at the raw material frontin terms of availability and Price?

The Company is having dedicated arrangementfor domestic supply of raw materials. The priceof the raw material is market driven and all PeerMills are dependant upon recycled fibres.Considering the nature of the industry and typeof raw materials used, its price and availabilityfactors would not have much impact on thecompany.

20

Sree Sakthi Q3 results

Sales up to 44 cr vs 35 cr (q3 fy 10)

Net Profit up to 1.5 cr vs 1.1 cr

9M fy 11 sales at 131 cr vs 102 cr

net profit at 5 cr vs 3.37 cr

9m eps not annualised 3 per share.

Amidst all this market mayhem the dividend yield is giving solid support to this stock. It has not budged much below 24-25 levels all this time.