TNPL - paper to packaging

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TNPL is one of the largest paper companies in India with a capacity of 6 lakh mtpa (4 lakh of writing paper and 2 lakh of paper board). It has the option to use bagasse, hardwood and deinked pulp. Like many other paper companies, it also has a barter system with sugar companies where it acquires bagasse from them in return for power/steam.
It markets paper under the brand name Aura and TNPL.

Positives:

  1. TNPL has the highest gross margin in the entire industry (Lowest cost producer)
  2. It primarily uses waste from other industries as its raw material, and so has its raw material supply tied up on a very large scale (Barrier to entry)
  3. Most importantly, it has put up the largest capacity to manufacture paper packaging boards. This makes it an indirect play on the e-commerce boom. It supplies this paper to packaging companies

The market for Packaging Boards is estimated at 2.68 Million tonnes. So they have a long way to go from the 2 lakh tonnes. Also the demand for packaging boards is estimated to grow at 12% per annum. In the 2 years of putting up the capacity, the utilization rate already seems to be very high, proving the demand for the segment. FY18 Q3 results indicate utilization of 43588 mts out of 50000 mts. My hypothesis is that the market may value a packaging company differently from a paper company.

Risks

  1. A large part of its business is in the paper segment, where there is no pricing power. So paper prices moving up and down affects its profitability.
  2. Asset heavy business and the reliance on debt to expand

Updates

  • In the recent past, one of the paper mills in India (Ballarpur) shut down, and so most paper companies have enjoyed a great run
  • There has been a water crisis in Tamil nadu, which has severely affected the current performance of TNPL. I assume this is not a long-term problem and normal profitability will return sooner or later

This is my brief analysis. Also it would be of great help, If someone who has been tracking this company, can answer the following questions

  1. What is the breakup of the revenues and EBITDA for writing paper and paperboard separately?

  2. The utilization of the paper board capacity has reached a high level very quickly. However, the expansion of 1,65,000 MTPA is for writing paper and not paper board, which is the higher growth product. Why is that?

  3. The operating profit margin for q3 2018 is low at 15%. The water crisis was over in July. What is the reason for this low margin?

Disc. tracking position

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Hi Akshay,

Good write up. I think the reason for the drop in margins could be due to competition, esp from companies that use waste paper as their raw material. Not sure of other answers. However, the valuations look good for a paper board company and can be explored.

Regards,
Raj

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Leading Player in the Industry: TNPL is one of the largest and most reputed companies in the Indian Paper Industry with third position in Installed Capacities and second position in production of Writing & Printing Paper in the country.

Global Presence: TNPL exports its products to more than 35 countries including Sri Lanka, Iran, Nigeria, Uganda, UAE, Sudan, Turkey, Kenya, Ghana, South Africa, Malaysia etc. These exports constitute around 20% of the total sales of the company.

Strong Demand for Products: With a burgeoning youth population and greater emphasis on education, environment, industrialization and entrepreneurship, the demand for paper and paper products in India has been witnessing a strong increase in last 5 years. This is clearly evidenced by the fact that the average capacity utilization for paper mills in India is around 90%.

Expansion Plans: As a part of its growth strategy, TNPL has embarked on a Mill Expansion Plan (MEP) in Unit II for producing additional 165,000 tonnes per annum of Writing & Printing Paper and a 400 tonnes per day chemical hardwood pulp producing mill. The total capital outlay for this expansion is estimated to be Rs 2,520 crores. On 14th June 2018, the board accorded its approval for implementation of this expansion.

Fully Integrated Units: TNPL has 2 manufacturing units with a combined capacity of 600,000 tonnes per annum. Both of these units are fully backward integrated with total in-house pulp producing capacity of 1,180 tonnes per day, captive power generation capacity of 138.5 MW, waste water and effluent treatment plants etc.

Optimum Utilization Levels: TNPL’s Unit I with a 400,000 tonnes per annum capacity of Writing & Printing Paper is running at 100% utilization levels. The Unit II, Greenfield plant, with a 200,000 tonnes per annum capacity of Paper Board, which commenced operations in the year 2016 took some time to stabilize. In FY 2018, the units suffered some production problems for a few months due to water shortage. This led to losses during the year. However, the water situation has now been stabilized and both the Units are expected to be running at a full capacity in the current financial year 2019.

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I have started tracking TNPL recently. Looking at it as a value pick (below BV) and bet on future consumption of India’s changing demography.

What I like:

  1. Only (not sure of this) player in the Paper industry which is completely backward integrated. Has plantations spread over 165,000 Acers which can provide the key ingredient of raw material.

  2. Capacity addition of 165,000 MT PA will be added in the next two years in phases, this will take the current 200,000 to 365,000, this will increase the revenue potential by over 30% in 2 years’ time.

  3. In niche packaging industry which will grow at 10% PA for next decade.

  4. Good dividend-paying company, this year may be low due to lower revenue. Last year Div yield was around 4%.

What I don’t know the impact of:

  1. Debt-funded Capex, might impact return ratios.
  2. Govt owned, don’t see as a big drawback. As this company has been an exception
  3. Dependency on the water for the production process, a bad monsoon can mean the impact on production and utilizations.

Where I see the future potential:

  1. Utilizations can go back to normal 85% from the current 50%, meaning more revenue

  2. MF start buying stock

  3. Packaging verticle picking up big way.

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I think, A cement production unit is also part of this company.

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I actually like TNPL but one risk we need to be cognisant of is the rain factor in TN. In case of poor rains in TN they are forced to shut their plant for months since paper manufacturing is a water intensive process.

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Since I am new to this stock. I dont have much information. I am thinking to buy because of cheap valuation and multiple business. If you have any important information please share.

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Mansion is normal this year, so water will not be a problem.

Real trigger is schools opening back in the next few months, and capacity addition.

Their backward integration for raw material is a real advantage in the industry.

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TN actually depends on the Winter rain in the months of Dec, the SW monsoon gives TN a miss and hence is not the major driver of rain

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Why QoQ revenue jump to 100%? Does anyone have an idea?

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Again loss: https://www.bseindia.com/xml-data/corpfiling/AttachLive/21ec517e-b051-4167-9478-8eef92b8f1cc.pdf

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Finally positive result: https://www.bseindia.com/xml-data/corpfiling/AttachLive/10ba41ca-4780-45ee-97d5-b7c34c03c803.pdf

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Hitting the ball out of the park. I think its an overlooked company, but highly cyclical. Sales up 16 percent YOY. Profit went from less than 1 cr to 112 cr. I dont want to write that in percentage terms. Margins expanded YOY Though quite similar to last quarter, means these margins are sustaining as of now. Lets see whether they can increase them from here on.

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