Paper & Pulp Industry-Looking Attractive

8/8/2019 Paper & Pulp Industry-Looking Attractive

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OctoberOctoberOctoberOctober 6666,,,, 2010201020102010

PAPER & PULP INDUSTRYLooking Attractive

AnalystAnalystAnalystAnalystRajiv BharatiRajiv BharatiRajiv BharatiRajiv Bharati


2/14

Pulp prices have risen substantially in 2010

852

930Hardwood pulp ($ per MT)

904

980

Softwood pulp ($ per MT)

Source: Bloomberg

540

618

696

774

Jan

-09

Mar

-09

May

-09

Jul-09

Sep

-09

Nov

-09

Jan

-10

Mar

-10

May

-10

Jul-10

Sep

-10

600

676

752

828

Jan-0

9

Mar-

09

May-

09

Jul-0

9

Oct-

09

Dec-0

9

Feb-

10

Apr-

10

Jul-1

0

Sep-1

0

2

Pulp prices globally are on the rise. In 2010, hardwood pulp prices has gone up by $180

per tonne, while softwood prices has risen by over $200 per tonne


3/14

Pulp price rise was led by events at the beginning of the year, with demand picking uplater

Chile got hit by earthquake, 8.8 onRichter scale in February

Finnish pulp suppliers had to stall supplyas the dock workers on Helsinki port

went on strike

U.S. govt withdrew subsidy of $125-$150 per ton for the treatment of black

liquor generated during pulp

Chile accounts for 8% of theworld paper output

Finland accounts for nearly 2%of the world output

manu ac ur ng rom an

Mills in the US, the largestmanufacturers and consumersof kraft paper, are using morewaste paper causing shortagesof waster paper in the exportmarket and a resultant rise in

prices

3

. mn tonne o t e tota .

mn tonne capacity had shut


4/14

Paper prices have risen as raw material prices have risen and demand conditions haveimproved

820

850

White Uncoated Woodfree sheet 80g ($/tonne)

730

760

790

Feb

-09

Apr-09

Jun

-09

Aug

-09

Oct-09

Nov-0

9

Jan

-10

Mar-10

May-1

0

Ju

l-10

Norwe ian a er maker Norske Sko 's chief executive recentl indicated that the com an is aimin

Source: Bloomberg

4

for much better prices than the current ones and that annual price deals should be replaced with

quarterly ones.

South African paper and pulp group, Sappi has indicated improving demand and price increases for its

coated fine paper grade. It foresees price rise for its coated mechanical paper in 2011.


5/14

Indian mills have hiked prices with rising demand and to pass on the rising rawcost.industry is mulling further price raise

161

174

187

200

India WPI Paper & Pulp

Domestic paper and newsprint manufacturers have raised prices in the range of `2,500-3,000 per tonne across all grades

In April, Ballarpur Industries, rolled back the discounts it had offered to its customers in March

135

148

Jan-0

0

Jan-0

1

Dec-0

1

Nov-0

2

Oct-03

Sep-0

4

Sep-0

5

Aug-0

6

Jul-07

Jun-0

8

May-0

9

Apr-10

Source: Bloomberg

5

In May, 2010, Ballarpur Industries (BILT) increased prices of coated papers by`

2,500 a ton and in certain uncoated varietiesby `750 a tonne

JK Paper Mills, raised prices of board by `1,000 per tonne in June

West Coast Paper has raised prices of uncoated paper, a variety that is used for copier, by `1,250-1,500 a tonne


6/14

Paper consumption in India will rise from the current consumption levels of 9.75 kg perperson per annum, way below world and Asia average

India

Percapita annual paper consumption (in kg)

Indian Paper Market (9.7 mn MT)

0 100 200 300 400

World Average

Asia Average

Finland

U.S.

China

Source: AP Paper Source: AP Paper

15%

39%41%

5%

Newsprint Writing and Printing

Industrial Variety Specialty Segment

6

One kilogram addition to per capita consumption means an addition of one million tonnes

of demand in a country of our size


7/14

..price rise to benefit the companies with secured raw material contracts and lowerdependence on imports

Raw material-wise paper mills in India(700 units)Production volume based on Raw

material used

Source: AP Paper Mills Source: Indian Agro Recycled Paper & Mills association

30%

39%

31%

Wood/Chemica l Pulp Recycled Fiber Agro Residues

50%

25%

Recycled or Waste Paper Agro Fiber Wood

7

o e paper m s n n a are agro ase , w e e pro uc on rom agro er amoun o o e o a

paper production in India

These mills are insulated from pulp price rise globally, and any paper price hike will percolate to the bottom-line

directly


8/14

Tamil Nadu Newsprint and AP Paper can be expected to benefit the most

0% 25% 50% 75% 100%

TamilnaduNewsprint

AP Paper

BILT

JK Paper

Rama Newsprint

0% 25% 50% 75% 100%

TamilnaduNewsprint

AP Paper

BILT

JK Paper

Rama Newsprint

Imported Indigenous

8

oo gro ecyc e


9/14

TNPL, AP Papers, JK Paper and BILT look attractive in that order

Company NameTamilnadu

Newsprint

Andhra

Pradesh

Papers

Ballarpur

IndustriesJK Paper

West Coast

Paper

Rama

Newsprint

* , , , , , , ,

Year End 201003 201003 201006 201003 201003 201003

Current Market Price 141.8 186.8 35.3 67.0 99.0 20.7

Market Cap (in `Mn) 9,831 6,130 22,878 5,220 6,210 1,220Revenue (in ` mn) 10,687 6,504 38,185 11,065 6,288 3,149

Net Sales 5yr CAGR 9.6% 7.9% 9.5% 13.9% 4.5% 1.3%

Operating Margin 17.9% 13.9% 13.5% 15.8% 14.6% -0.5%

PAT Margin 11.4% 8.3% 6.3% 8.2% 8.7% -0.2%

ROE 15.7% 11.8% 9.7% - 9.0% -10.8%

EPS (in `) 17.6 21.0 3.1 11.3 15.0 -9.7

P/E 8.1 8.9 11.4 5.9 6.7 -

P/B 1.2 1.4 1.1 1.1 3.4 0.6

9

ROCE 8.6% 9.3% 7.7% 15.1% 4.9% -

EV/ EBITDA 11.8 12.1 - 8.7 4.5 -

*MTPA stands for Metric tonne per annum


10/14

Investment positives

TNPL has the largest bagasse based manufacturing

facility in the world with capacity of 245,000 MTPA

(Metric Tonne Per Annum). The company plans to

extend the capacity to 400,000 MTPA by end of 2010

TAMILNADU NEWSPRINT LIMITED (TNPL)Market Price : ` 142.5

(```mn) - Standalone Q1FY11 Q1FY10 FY10 FY09

Revenue 2,972 1,834 10,687 10,968

Operating Income 626 242 1,911 1,991

Other Income 4 3 50 35

148

169

190

NIFTY Index TNPL

TNPL produces various grades of printing & writingpaper (PWP) and Newsprint paper. In FY10 they

produced only PWP

TNPL requires bagasse & wood in ratio of 60:40 to

produce one ton of paper. This reduces it cost of

producing paper by `2000 to `4000 per tonne as

compared to pure wood based producers.

TNPL procures bagasse by bartering it with sugar mills

for ower hence ba asse rices ets decou led to

, ,

PAT 399 71 1,220 1,064

EPS (`) 5.8 1.0 17.6 15.4

Operating Margin % 21.1% 13.2% 17.9% 18.1%

Net Margin % 13.4% 3.9% 11.4% 9.7%

10

85

106

127

Oct-09 Dec-09 Feb-10 May-10 Jul-10 Sep-10

the finished products prices With 30% rise in sugarcane production expected next

year, bagasse supply will be abundant

Going forward, the company intends to build 300tpd

de-inking plant to produce pulp from waste paper.


11/14

Investment positives APPM owns and operates two units, one at

Rajahmundry and another at Kadiam, with

cumulative finished paper capacity of 240,000

MTPA and bleached pulp production capacity

ANDHRA PRADESH PAPER (APPM)Market Price : ` 189.6


Revenue 1,762 1,390 6,504 6,332

Operating Income 273 160 903 663


of182,500 MTPA

The company manufactures paper of various

kinds like PWP, industrial, newsprint and copier

78% hardwood base facility with integrated

domestic farmlands to procure wood. Of the totalraw material consumed only 20% in imported

Reduction in consumption mix, lower utilization

of bamboo and procurement from catchment

PAT 162 82 542 190

EPS (`) 4.1 3.2 21.0 7.4


Net Margin % 9.2% 5.9% 8.3% 3.0%

262

321

380

NIFTY Index AP Paper

11

its raw material cost per tonne of product. Theratio of bamboo and hardwood for 2009-10 was

2:98 as against 5:95 in 2008-09.

The company has encouraged farm forestry to

attain self sufficiency in procuring raw material.

85

144

203

Oct-09 Dec-09 Feb-10 May-10 Jul-10 Sep-10


12/14

Investment positives

JK Paper is Indias largest producer of branded

papers and a leading player in the Fine Papers and

Packaging Board Segments. It has two units in

Rayagada (Orissa) and Songadh (Gujarat) with

JK PAPERMarket Price : `66.45


Revenue 2,912 2,608 11,065 10,821

Operating Income 488 433 1,750 1,118


cumulative capacity of 240,000 MTPA. It operates in two segment, packaging boards and

PWP

JK Paper Mills, raised prices of packaging board by

`1,000 per tonne in June

Currently, high-end product segments, such as

coated paper, copier paper and board, account for

more than 95% of JKs sales. It has a leadership

osition in the co ier se ment with brands such as

EBITDA 494 435 1,754 1,118

PAT 291 202 910 380

EPS (`) 3.6 2.5 11.3 4.7


Net Margin % 10.0% 7.7% 8.2% 3.5%

143

164

185

NIFTY Index JK Paper

12

JK Copier, JK Easy Copier, JK Excel Bond and JKBond.

JK has a huge investment plan for the next two

years. It intends to raise the capacity to 400,000

tonnes (a 66% jump) at an investment of `15,000

mn.

80

101

122

Oct-09 Dec-09 Feb-10 May-10 Jul-10 Sep -10


13/14

Investment positives BILT is India's largest paper company and the only Indian

company to rank amongst the top 100 paper companies in the

world. The company accounts for over 50% of the coated

wood-free paper market, an impressive 85% of the bond

BALLARPUR INDUSTRIES LIMITED (BILT)Market Price : ` 34.7

(```mn) - Consolidated Q4FY10 Q4FY09 FY10* FY09

Revenue 10,812 7,272 38,185 28,361

Operating Income 1,597 962 5,165 4,215

Other Income 0 17 17

paper market and nearly 45% of the hi-bright Maplithomarket, besides being India's largest exporter of coated paper.

BILT plans to invest `35,000 `40,000 mn over the next 5

years to double its production capacity. BILTs current capacity

stands at 1,000,000 MTPA.

In Q4FY10, amidst robust demand, BILT rolled back discounts

it had offered to its customers in Q3. Also it increased prices of

coated papers by `2,500 a ton and in certain uncoated

varieties by `750 a tonne.

, , ,

PAT 830 447 2,404 1,879

EPS (`) 1.0 0.6 3.1 2.7


Net Margin % 7.7% 6.1% 6.3% 6.6%

*June ending financial year

134

152

170

NIFTY Index BILT

13

BILT acquired Premier Tissues India (PTIL),the largest player inthe tissue paper market in India, for ` 765 mn. The size of the

organized tissue paper market in India is estimated at around

`12,000 mn.

BILT is trading at 6.35 times FY11 consensus earnings .

80

98

116

Oct-09 Dec-09 Feb-10 May-10 Jul-10 Sep -10


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Paper & Pulp Industry-Looking Attractive

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