Satia Industries – Journey towards Cyclical to Shallow Cyclical?

Satia Industries Ltd.

Why we like the stock?

1. Satia is one of the more efficient players in the paper industry, because of their backward integration.

2. They have 100% co-gen power facilities which lets them use electricity at cost of Rs 2-2.5 per unit against grid cost of Rs 7-8 per unit.

3. They have a caustic soda recovery plant. Paper is an industry which uses lots of caustic soda and it is very expensive at around Rs 50000 per ton. Satia has a plant that can recover 90% of the caustic soda they use in the manufacturing process. This is approximately 120-130 tons a day which comes to cost savings of about 60 lakhs a day, which means savings of 180 crores a year.

4. Satia is strategically located in Punjab which allows for easy availability of agro based raw material used to make paper. This helps them save on freight costs.

5. The agro based raw materials such as rice straw and rice husk which they use for generating power are usually burned by the farmers causing stubble burning pollution. Satia is transforming waste which would have caused pollution into something valuable. Because this is considered as green energy they earn REC certificates on this. These certificates can be traded on the energy exchanges and is an additional income for the company.

6. They have recently installed boilers in their plant which are able to use rice straw while most other players’ boilers use rice husk. For comparison, rice husk costs Rs 7000-8000 per ton, which while rice straw costs Rs 2000-4000 per ton. This allows for more cost savings

7. They have existing relationships with State Textbook corporations, and these corporations place bulk orders with Satia for paper. Because of this, we don’t see the volitility in their PAT numbers as compared to other paper players which mostly sell through the market. These relationships will be of further help to them, when the NEP is implemented and all new books have to be printed.

8. Even during peak covid period, when almost all other paper manufacturers were posting losses, they never posted a single quarter of loss. This points to an inherent strength in the business.

9. Usually in these types manufacturing companies such as paper, cement, steel, being the lowest cost and the most efficient producer is THE moat. And Satia, seems to have a deep one at that.

10. They are upgrading their wood pulping facilities from 150MT per day to 300MT per day. Once that is operational they’ll be able to make higher grade paper on their latest PM4 machine. This will lead to further margin expansion and higher profitability with operating leverage.

Risks:

1. Low float
2. Paper price volatility. This remains a risk even though they have proved they could remain profitable even during lockdown period which was probably the worst time for the paper industry ever, in recent decades

Disclosure: Invested from 90 levels.