Dear Members,

We have released 26th Mar’17: Ruchira Papers Ltd (NSE Code – RUCHIRA) – Alpha/Alpha Plus stock for Mar’17. For details and other updates, please log into the website at the following link – https://katalystwealth.com/index.php/my-account/

Detailed pdf report on the company can be accessed at the following link – Ruchira Papers (NSE Code – RUCHIRA) – Mar17 Katalyst Wealth Alpha Report

Note: For any queries, mail us at info@katalystwealth.com

Date: 26th Mar’17

CMP – 145.40 (BSE); 145.60 (NSE)

Rating – Positive – 3% weightage; this is not an investment advice (refer rating interpretation), the rating is only for indicative purpose and please take your own decision regarding the same.

Introduction

Promoted by Mr. Umesh Chander Garg, Mr. Jatinder Singh and Mr. Subhash Chander Garg, Ruchira Papers Ltd (RPL) is engaged in the manufacturing of Kraft Paper and Writing & Printing Paper (WPP).

The company manufactures Paper only from agriculture waste and waste paper and is therefore engaged in paper production with very low carbon footprint.

We are looking at Ruchira Papers from medium term investment perspective as we believe there are industry tailwinds and at the same time find RPL as one of the most efficient players to capitalize on the opportunity.

The company has been gradually expanding its capacity without going for any big-bang expansion and has shown great consistency in maintaining margins despite the commodity nature of the industry.

Lastly, what is pleasing to note is that promoters have been continuously increasing their stake in the company through open market purchases. Over the last 5 years, the promoters have increased their stake in the company from 54.82% at the end of Dec’11 to 61.07% at the end of Dec’16.

One concern that we have right now is that post Mar’18, the company will lose excise exemption benefit on its writing and printing paper facility; however as per the management the impact will be limited at 1-2% of realization and they will try and overcome the same through price increase.

Business

As mentioned above, Company is engaged in the manufacturing of Kraft Paper and Writing & Printing Paper. Writing and Printing Paper is used for multiple purposes like printing and stationery etc.

Kraft Paper finds its application in the packaging Industry especially for making Corrugated Boxes / Cartons and for other packaging requirements.

The company manufactures paper using agricultural residues such as wheat straw, bagasse, sarkanda and other materials. It doesn’t rely on wood based fiber for its raw material requirements.

As per the management, until some years ago, there was no economic use for the straw that remained after farmers harvested their cereal crops in Himachal Pradesh, Haryana and Punjab. Nearly 90% of the remaining stalks were burned to clear fields for the next harvest and this caused immense pollution.

Manufacturing paper from agricultural residue has several benefits:

  • Promotes the use of renewable crop, reducing the demand for wood-based fiber
  • Reduced cost from the transportation of wood-based moulded to lighter, stronger alternative
  • Reduced CO2 emission by 25% compared with conventional wood fiber pulping

Around 30 years back the company set up Kraft Paper manufacturing facility with a small 2,310 TPA (tonnes per annum) capacity. Over the years the company undertook several phases of expansion and increased the capacity to around 52,800 TPA and now expanding further.

In 2008, the company set up a 33,000 TPA manufacturing facility for writing and printing paper, while prior to that it was manufacturing only Kraft paper.

It is important to note here that WPP commands much higher realizations than Kraft Paper and therefore despite lower sales in terms of tonnage, WPP now accounts for more than 60% of the sales of the company against 0% before 2008.

Value added – Within WPP, the company has extended from the manufacturing of ordinary paper varieties to various value-added. The company introduced coloured paper in 2011; the proportion of revenues derived from this product is increasing in the Writing & Printing business. Coloured paper generates a premium of Rs 2 to Rs 3 per kg over the prevailing Writing & Printing paper average.

Capacity expansion – After remaining stuck at 85,800 TPA for some years, the company has carried out de-bottlenecking exercises through which it has been able to increase combined capacity to around 116,000 TPA. The company is carrying out further enhancements through which the capacity will be increased to 128,000 TPA and the benefits of the same will accrue over the next 2 years.

It is important to note here that in the past company has been able to run its plants at more than 100% capacity utilization.

Further, as per the management the company will seek to continue enhancing production by 10-15% each year through various initiatives – rebalancing equipment, generating more from less and responding to emerging opportunities.

We believe, unlike 2008, when company carried out a major expansion and suffered on the profitability front for the next few years, the expansions going forward will be more nuanced.

Paper industry overview – The Indian paper industry with approximately 13 million (mn) tonnes of capacity accounts for about 3% of global paper production. According to Indian Paper Mills Association, the domestic consumption of paper in India during 2014-15 was 13.9 mn tones, yoy growth of 6%.

According to various sources, global average per-capita paper consumption stands at around 58 kg, whereas the same is around 110 kg in Europe and 337 kg in North America. In India, on the other hand, the per capita paper consumption hovers between 9 and 11 kg.

With increasing focus by government on education and general uptick in macro economy, CARE Rating expects Indian paper industry to witness a CAGR of 7% over the next five years to about 20 mn tones. The growth will be largely driven by printing & writing and packaging & paper board segment.

  • Printing and writing segment – Printing and writing segment caters to office stationary, textbooks, copier papers, notebooks etc. This segment accounts for ~31% of domestic paper industry. Governments thrust on education through steps like Right to Education, Sarva Shiksha Abhiyan, rise in service sector are key factors contributing to the growth of this segment.
  • Packaging paper and Board – Packaging paper & board segment caters to tertiary and flexible packaging purposes in industries such as FMCG, food, pharma, textiles etc. This segment forms ~47% of the domestic paper industry. This is currently fastest growing segment owing to factors such as rising urbanization, increasing penetration of organized retail, higher growth in FMCG, pharmaceutical.

Promoters/Management

Ruchira Papers is an owner operated business. The company is promoted by Mr. Umesh Chander Garg, Mr. Jatinder Singh and Mr. Subhash Chander Garg.

The above 3 are from diverse fields and look after various operations of the company. Mr. Jatinder Singh addresses finance, administration and procurement, Mr. Subhash Chander Garg looks after taxation, marketing and sales while Mr. Umesh Chander Garg manages the production, maintenance and technical aspects.

In small cap companies, we believe it’s important as an investor that the promoters hold reasonably high stake and in the case of Ruchira Papers the promoters own more than 60% stake in the company.

What is even more significant is the way the promoters have increased stake over the last 5 years and that too through open market purchases. Promoters increasing stake in their own company through open market purchases is almost always indicative of good prospects of the company.

Overall we find the promoters to be good as they have managed the operations very efficiently. We like their focus on various aspects of the business such as water conservation, working capital management, power and fuel consumption efficiency, value addition, etc. Since FY 10 they have been continuously reducing debt while gradually expanding the manufacturing capacity.

Operating Performance

We believe Ruchira Papers is gradually moving towards being a more efficient player with respect to both business operations and financial parameters.

Instead of big bang expansion, the management now seems more focused on gradual expansion through de-bottlenecking, efficiency enhancement exercises and technological improvements.

From FY 05 to FY 11, the company reported very strong growth in sales at more than 30% CAGR; however the profitability suffered as company resorted to big ticket expansion for setting up WPP manufacturing facility and took on huge debt.

Since FY 11, the company’s focus has been on efficient utilization of existing capacity by mining more out of available infrastructure and resources. As a result, the before tax profitability has improved substantially with improvement in gross margins, reduction in interest cost and lower depreciation charge as a % of sales.

While the sales growth since FY 11 has been sluggish at around 7.5% CAGR, we believe the run-rate can improve going forward to around 15% on the back of steady capacity expansion and growth in realizations. Over the last few years the realizations have improved at a rate of 1.8% CAGR for Kraft Paper and 5% CAGR for WPP.

On the profitability front as well we expect the company to record around 15% CAGR as the margins are expected to be maintained or may improve slightly and the interest and depreciation charges are not expected to increase commensurately.

As far as return ratios are concerned, the company has consistently been recording ROE and ROCE in excess of 15%.

Valuations

At around current price of 145 the market capitalization of the company is Rs 327 crores and the enterprise value is ~ Rs 395 crores. Over the last few years the absolute debt of the company has reduced from around Rs 140 crores to Rs 70 crores and the debt equity ratio has improved from 2.4 to 0.5.

For the trailing twelve months the stock has recorded PAT of Rs 27 crores and EBIT of Rs 48 crores. The stock is therefore trading at 12.11 times trailing twelve months earnings and EV/EBIT multiple of 8.25.

We believe the current valuations on absolute basis are reasonable; though sustainability of the same would depend on earnings trajectory over the next few quarters. What is good from minority shareholder’s perspective is that promoters have been buyer of the stock around levels of 100 and above. Further, they are also going for preferential allotment of share warrants at Rs 140.50/- per share.

As far as sustainability of earnings is concerned, as mentioned above (barring unforeseen circumstances) the company is likely to record ~15% CAGR in sales and profits for the next 2 years or so.

The stock offers 1% dividend yield.

Risks and Concerns

Paper manufacturing is a very competitive industry; so while Ruchira Papers has shown good resilience in terms of maintenance of margins; they may go for a toss (especially in short term) if there’s wide variation in prices of raw materials or if imports increase substantially.

Water is an essential ingredient in the paper manufacturing process; any restriction on the usage of water can adversely impact the production of the company.

Effluent treatment is also an essential part of paper manufacturing process; any laxity on that front can bring in troubles for the company.

Sustainability of earnings growth will be important for the sustenance of current level of valuations; else stock might witness de-rating.

 

Disclosure: I don’t have any investment in Ruchira Papers and have not traded in the stock in the last 30 days.

Best Regards,
Ekansh Mittal
Research Analyst
http://www.katalystwealth.com/
Ph.: +91-727-5050062, Mob: +91-9818866676
Email: info@katalystwealth.com

 

Rating Interpretation

Positive – Expected return of ~15% + on annualized basis in medium to long term
Neutral – Expected Absolute return in the range of +/- 15%
Negative – Expected Absolute return of over -15%
Coverage closure – No further update on the stock

% weightage – allocation in the subject stock with respect to equity investments

Short term – Less than 1 year
Medium term – Greater than 1 year and less than 3 years
Long term – Greater than 3 years

 

Research Analyst Details

Name: Ekansh Mittal     Email Id: ekansh@katalystwealth.com    Ph: +91 727 5050062

Analyst ownership of the stock: No

Details of Associates: Not Applicable

Analyst Certification: The Analyst certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report.

Disclaimer: www.katalystwealth.com (here in referred to as Katalyst Wealth) is the domain owned by Ekansh Mittal. Mr. Ekansh Mittal is the sole proprietor of Mittal Consulting and offers independent equity research services to retail clients on subscription basis. SEBI (Research Analyst) Regulations 2014, Registration No. INH100001690

Ekansh Mittal or its associates including its relatives/analyst do not hold beneficial ownership of more than 1% in the company covered by Analyst as of the last day of the month preceding the publication of the research report. Ekansh Mittal or its associates/analyst has not received any compensation from the company/third party covered by Analyst ever. Ekansh Mittal/Mittal Consulting/analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market-making activity of the company covered by Analyst.

We submit that no material disciplinary action has been taken on Ekansh Mittal by any regulatory authority impacting Equity Research Analysis. A graph of daily closing prices of securities is available at www.bseindia.com

The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision

This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Ekansh Mittal/Mittal Consulting/Katalyst Wealth is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Ekansh Mittal or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Neither Ekansh Mittal, nor its employees, agents nor representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Ekansh Mittal/Mittal Consulting or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement.

The recipients of this report should rely on their own investigations. Ekansh Mittal/Mittal Consulting and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. Mittal Consulting has incorporated adequate disclosures in this document. This should, however, not be treated as endorsement of the views expressed in the report.