My note on Ruchira
Ruchira Papers
CMP: 43.xx
Market Cap.: ₹ 97 Cr.
Book Value: ₹ 49.59
Stock P/E: 6.4
Dividend Yield: 3%
Face Value: ₹ 10.00
ROCE 3yr avg: 17.61%
ROCE: 18.60%
Debt: ₹ 57 Cr.
Inventory turnover ratio: 8.35
Inventory turnover ratio 3Years back: 6.90
Profit growth: 24.02%
Profit growth 3Years: 57.81%
Promoter holding: 59.51%
D/E is 0.54
Dividend Payout Ratio: 17.60%
Return on equity: 16.97%
Pledged percentage: 0.00%
Interest Coverage Ratio: 3.76
Contingent liabilities: ₹ 6.08 Cr.
About Paper Industry (From the AR itself):
The paper industry in India could be classified into three categories according to the raw material consumed.
1. Wood based
2. Waste paper based
3. Agro based.
The Indian paper industry produces 10.11 million tons paper per annum, just 1.6% of the total world production of 394 million tons. The Scandinavian countries, USA, Russia, China, Indonesia and Japan are the major players in the field of pulp and paper. These countries have some of the best available raw material for paper production and state-of-the-art technology.
In accordance with the economic growth and it is estimated to touch 13.95 million tons by 2015-16. Paper in India is expected to see an average growth of 7 per cent during the next year according to prediction by the Indian Pulp and Paper Technical Association. The sector is expected to grow 7 per cent per annum.
Currently, the Indian industry is accounts to about 2.5 per cent of the global production of paper. The mills use a variety of raw material viz. wood, bamboo, recycled fibre, bagasse, wheat straw, etc.; approximately 35% are based on chemical pulp, 44% on recycled fibre and 21% on agro-residues. The per capita consumption of India stands at only 9.3 kg compared to China’s 42 kg, Indonesia’s 22 kg, Malaysia’s 25 kg and the US’ 312 kg. Studies have shown that the growth of paper consumption changes from linear to exponential trends once the GDP growth rate crosses the double digit mark. Analysts often draw comparisons between the growth seen in bottled drinking water and tissue paper industries.
There are about 750-800 paper mills (Organized & Unorganized sector) in the country out of which 12 large units accounts for production share of about 30% and balance units mostly comprising of medium and small paper mills with production share of 70%. Wood based industry accounts for 31% of production while waste paper and agri residue accounts for 47% and 22% respectively. Capacity wise industrial paper accounts for about 40%, Writing & Printing paper 35%, specialty paper 6% and Newsprint 19% of total production.
The major players of the industry are located in Andhra Pradesh, Tamil Nadu, Maharashtra, Punjab, Madhya Pradesh and Gujarat
The key challenges to be met is market conditions which are poor and technology obsolete, lacking ability in achieving economy scale and lack of skilled labour.
About Company:
Ruchira Papers Limited setup by 3 technocrat partners is into paper manufacturing with agriculture residue and waste paper as raw materials material rather than the traditional raw material wood pulp which is quite difficult to source. Came out with IPO in November 2006. The Company started operations in 1983 with manufacturing of Kraft Paper that is used for packaging, corrugation, core pipes, cones etc.
With setting up of 100 TPD Writing and Printing Paper plant in the year 2008, the Company has widened its product base in multi-purpose Writing & Printing segment of Paper.
At present, the installed capacity of the Kraft Paper unit is 52800 MT per annum and for Writing & Printing Paper unit it is 33000 MT per annum. Presently the Company is operating more than of its installed capacity. The increase in education expenditure will definitely require more Writing & Printing Paper and the management anticipates a faster growth rate of Writing and Printing Paper. Writing paper commands a higher realisation and higher margin when compared to Kraft Paper.
Indian Paper Manufacturers Association (IPMA) projects that India’s demand for paper is expected to double to 20 million tonnes by 2020.
Due to the ecological problems caused by usage of plastic materials, paper is becoming the most favoured option for packaging.
The growth of the manufacturing sector will also enhance the demand for Kraft paper.
In FY15, Ruchira clocked total revenue of Rs. 347 crores, net profits of Rs. 13 crores and cash profit of Rs. 23 crore.
Promoters have been able to achieve production higher than the installed capacity with help of debottlenecking. In FY15, the Kraft Paper production reached 102% while that of Writing paper reached to 131% of its capacity.
OPPORTUNITIES AND THREATS
The global paper industry is witnessing a fundamental change with the demand shifting to emerging economies particularly Asia. The paper industry in China and India has emerged to be among the top global players and are expected to improve their ranking significantly in the coming years. India in particular has good growth potential. The low current per capita consumption of paper in India, around 9.3 Kilograms as against the world average of 57 Kilograms, reflects the significant potential that the industry offers in the future. Increasing usage of high speed printing/copying machines with colour reproduction is propelling demand for high quality Writing and Printing papers. This trend will be beneficial for the Company.
Opportunities: The Company being located in Himachal Pradesh is presently entitled to 100 % excise duty exemption for 10 years with effect from 30.03.2008 for the Writing & Printing Paper unit and concessional rates of Central Sales tax at 1.5 % against 2 % in other states. The Company is having a Captive Power Cogeneration Plant, which helps to get the cheap and uninterrupted power supply. Consistently complying with Environmental norms regarding Chemical recovery and is having its own chemical recovery system in place. Further, the location of the factory at the outskirts of Himachal Pradesh helps to get raw material agro residues from the neighbouring agricultural rich states of Haryana and Punjab. Per ton production cost of paper from agricultural residue is lower than that from the imported wood pulp. E-commerce led demand of corrugated boxes which are made out of Kraft Paper to benefit Ruchira. Kraft paper production for Ruchira grew by 14% YOY.
Threats: As the Indian Paper market grows it is attracting major international players who have access to better technology to setup business in India. The Company recognizes this challenge and has made conscious efforts to build a strong competitive advantage through increased brand equity, wider network and use of contemporary technology. Further Import duty on paper & paper board for ASEAN countries has been reduced from 2.50% to 0% with effect from 01.01.2014 which had implications in terms of cheaper imports being 2.25 million tonnes in 2013-14 as against 2.03 million tonnes in 2012-13. The Company has been also increasing its reach in the rural markets by increased distribution and customized packs. Further steep increase in Raw Material prices and shortage of raw material is creating threats for the paper industries. Lower Growth in Paper Demand due to digitization.
PRODUCT ANALYSIS
The Company is engaged in manufacturing of Writing & Printing Paper and Kraft paper. Writing & Printing paper is manufactured from virgin pulp (agro based), which finds its usage in manufacturing note book and for printing and publishing, a special grade of paper is also manufactured for wedding & greeting cards, art sheets & coloured scrap books, drawing sheets & paper for multipurpose office use. The market for Writing and Printing paper is expected to grow by about 9% annually over the next 5-7 years. The industry will see acceleration in the trend that favours branded and value added products.
Apart from Writing and Printing Paper, product range of Company also includes Kraft Paper which finds its application in the manufacturing of corrugated boxes, corrugated rolls for industrial packaging. The Company also manufactures a special grade of Kraft Paper known as DTY/POY grade which is used in the manufacturing of textile tubes and in wrapping of different types of Yarn.
My Investing rationale:
• Increase in promoter stake by 5% in last 3 years.
• Cheap Valuations
• Ecom Boom
• Textile Boom
• Manufacturing sector getting a boost
• Dividend Yield acting as a cushion
• Free cash Flows
Discl: Invested. Please do your own due diligence before investing.
Inputs have been taken from screener, moneycontrol, AR of Ruchira Papers and prosperotree.com
Regards
Sri Krishna Bhutra
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