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Thursday, 31 August 2017

Kuantum Papers: Potential Microcap Multibagger

Kuantum Papers Ltd; CMP - 484.45; P/e - 6.5; P/Bv - 1.9; 52 Week High/Low:556.40 / ₹ 260.00

Disclaimer: Very important points
Kuantum Papers is not a buy call, but a buy idea, that's why not mentioned target or Stop loss. 
Kuantum Papers is a micro cap; Risk is always there;
Kuantum Papers is a very low volume trading scrip, so hitting LC and UC will be easy so need not be panicked


Before going to details, just a small phrase on why I choose the scrip.

Graham number 22.5: P/e x P/bv <22.5, here 12.5 ☺
Fair Value: EPS x ROE > CMP, here 69 x 34 = 2346 ☺


Know your Company:

Kuantum Papers is in the business of production and marketing of wood free writing and printing paper, thereby giving a right replacement of wood based paper, while conserving precious resources & protecting the environment.
The mill was established in 1979-80, in an economically backward village - Saila Khurd, in District Hoshiarpur, in the state of Punjab, India, with an aim to utilize wild Agro vegetations like Sarkanda Grass and Kahi Grass, and Agro-residues such as Wheat straw and Rice straw, to make a writing and printing paper. These Agro vegetations were at the time being burnt in the fields, leading to environmental pollution. Thus by creating an application for their use, we helped reduce environmental degradation substantially. The company which initally started 30 TPD paper production, has now reached a level of 300 TPD in paper production. The company employs approximately 1250 people, and the annual sales turnover touches 5000 million INR

Plant Facility:

The paper plant is located at Sailakhurd, District Hoshiapur in Punjab, situated on the main National Highway connecting Chandigarh – Hoshiarpur – Pathankot, spread in an area of 257 acres. The plant is an integrated facility to make pulp and paper with a capacity of 100,000 tonnes per annum of finished paper. The pulping section is equipped to handle various kinds of agricultural residues, straws, bagasse, and wood.

 Innovation: 

ENVIRONMENT:
In the year 2003, Ministry of Environment and Forests (MoEF) issued a Charter on Corporate Responsibility for Environmental Protection (CREP) and made it mandatory for all the paper mills to either install a chemical recovery system or alternate option of removal of black liquor to achieve discharge norms within a period of three years. Unlike other paper mills which go in for conventional chemical recovery systems, a unique process of Lignin Precipitation was identified and a joint venture company, Greencone Environs Pvt. Ltd., was established with a Swiss Company, Granit S.A., for implementation of full scale Lignin Precipitation System (LPS) Plant, which is the first of its kind in the world, for recovery of lignin powder which is used for high value applications in various consumer applications such as adhesives, concrete admixtures etc. with 100% buy-back guarantee of the final product from Granit S.A. This innovative approach has not only increased revenue of the company, besides fulfilling the CREP Guidelines, but at the same time offered a viable option of environmental pollution control to entire agro-based Paper Industry.

ENERGY
The high energy consumption was another concern and therefore special attention was given in this area with the involvement of DSCL, New Delhi, various projects for energy conservation were identified & implemented as a result of which, the power consumption was reduced from 1312 units/ton of paper in 1996-97 to 1050 units/ton of paper in 2003-2004.This approach not only resulted in the reduced production cost but was also appreciated by the Govt. of India by selecting the Company for National Energy Conservation Award. The power cost was further reduced by installing a small co-generation plant followed by captive power plant thus making the unit non - dependent on State Electricity Board.


TQM
With an aim to improve the productivity and profitability, various project such as reduction in steam consumption under TQM (total Quality Management) System have been successfully implemented. The TQM Project implemented by the mill on reduction in steam consumption on paper machine has been awarded prestigious North-West Qualtech Award in 2004. The Company has started implementation of Total Productive Maintenance (TPM) process in the plant with the view to further improve the plant & machinery reliability and also increase the employee involvement in decision making.


Products

Paper- The company manufactures a range of paper such as maplitho, coloured paper, ledger, cartridge, parchment and duplicating paper. Besides this, it manufactures wood-free speciality papers such as ABC gold, aqua-sapphire, pearl white and diamond colour. These products find applications in printing of books, trade directories, newsprint, diaries, calendar, computer stationery, etc.

Lignin- In the year 1995, the company collaborated with a Swiss Company-Granit S.A to form a joint venture company called Greencone Environs. The objective of this JV was to recover lignin from the pulp mill effluent, black liquor through LPS (Lignin Precipitation System) process. Lignin is widely used by industries such as concrete, plywood as partial replacement of phenol, agrochemicals, animal feed, refractories, etc.
Asian Lignin Manufacturing of Chandigarh is subsidiary of Granit S.A Switzerland. This company is engaged in marketing of lignin and lignin based products for commercial applications.

Multibagger worth Fundamentals: 

Positive:

Financial Performance:

Sales growth at 16% YoY, 8% 3 yrs, 10% 5 Yrs, 16% 10 Yrs; Trend Positive;
OPM growth at 19% YoY, 15% 3 yrs, 14% 5 Yrs, 15% 10 Yrs; Trend Positive;
PAT growth at 148% YoY, 22% 3 yrs, 75% 5 Yrs, 19% 10 Yrs; Trend very positive;
Cash from Operating activities, 34% up YoY and highest historically
Net profit Margins at 10%, highest historically

Return Ratios:

Return on Equity: ROE:  34% best among peers and highest historically
Return on Capital: ROCE: 23% best among peers and highest historically
Return on Assets: ROA: 6%, decent historically

Efficiency : 

EBITA Margin% at 18.63,  highest historically
EPS is 69.8, highest industry wise
Book Value is highest historically
Days Receivables and payables are less than 20

Valuation :

Price to equity is just 6.7, lowest among peers, compared to industry P/e -45.
Market cap is just 431cr, compared to yearly sales of 610 cr.
P/bv is at 1.91 which is median among peers and book value increasing YoY
D/e ratio although at 1.15 but historically low

Other Imp. points:

Company infusing capital in Fixed assets Yoy, one of the reason for D/e 1.15, so its a positive
Share Capital is just 39cr compared to reserves of 200 Cr. and reserves increasing YoY
Increase in Net fixed assets of 12% compared to last year
Regular dividend paying from last 3 years with 0.41 Dividend Yield
Graham number 22.5: P/e x P/bv <22.5, here 12.5
Fair Value: EPS x ROE > CMP, here 69 x 34 = 2346 
Solvency ratios are also good. Interest coverage ratio: 5+ and Current Ratio: 1+
Promoter holding a huge 70.3% and flat
Other income is very less about 1.5 cr and flat compared to operating profit 120+ cr
Regular Tax payer
Positive net cash Flow

Negative Points:

Sales growth is not huge only 10% compared to profit growth of above 80%
Debt is high historically
Promoters pledged 18% of their 70.3 holdings
Dividend not declared from 2012-2014, although there are profits
Price to book is little higher side at 1.91 for a micro cap

Opportunities and threats:

Opportunities:

  • The  Indian paper industry is expected to grow by 5.5-6.5% CAGR through 2020-21. The demand  will be driven and supported by greater Government spending on education initiatives, corporate  spending on stationary and healthy growth in services sector .  
  • Despite  the  higher  level  of  technology  being  used  in  the  corporate  sector ,  there  has  been  no  decline  in  the  paper  consumption.  Infact  paper  demand  continues  to  rise  at  a  modest  pace.  The  envisaged  growth  in  the  value-added  printing  &  writing  paper  segment  in  India  presents  an  invaluable  opportunity
  • The  company  has  been  one  of  the  most  cost  competitive  paper  mills  and  a  large  player  in  the  writing  and  printing  segment.  The  continuous  ef forts  of  the  company  towards  cost  reduction  and  technology  up-gradation  has  led  to  improved  product  quality ,  enhanced  product  range,  and  increased  production  capacity ,  higher  operational  ef ficiencies  and  economies  of  scale.  
  • Further  these  initiatives  have  also  enabled  the  company  to  manufacture  premium  quality  paper ,  such  as,  coated  paper ,  maplitho  paper  and  premium  copier  paper ,  which  is  placed  in  the  higher  value  segment,  competing  with  quality  of  other  large  paper  mills
  • Despite  agri- residues  being  seasonal  in  nature,  this  is  the  segment  of  raw  material  which  your  company  has  mastered  processing  of,  and  has  therefore  gained  an  edge  in  the  industry . 

Threats:

  • Inspite  of  advancement  in  technology ,  like  the  usage  of  iPads,  Galaxy  T abs,  Smart  Phones,  the  increased  preference  for  online  storage  and  dissemination  of  data,  the  paper  industry  is  poised  for  a  consistent  growth  in  the  demand  for  paper  in  next  few  years. 
  • Raw  material  costs  account  for  around  40  %  of  the  operating  income  of  mills  in  the  paper  industry .  W ood  and  wood  based  pulp  are  the  main  raw  materials  required  for  manufacturing  W&P paper ,  especially  in  the  higher  end  papers  such  as  maplitho  and  coated  paper .  India's  wood  resources  are  limited;  therefore,  cost  of  wood  is  much  higher  in  global  comparison.  Since  there  is  conspicuous  absence  of  Government's  policies  favouring  industrial/production  plantation,  securing  future  wood  supplies  will  be  the  Industry's  biggest  challenge.  In  line  with  this  increase  in  production,  demand  for  raw  materials  will  also  go  up. The  dif ferent  raw  materials  used  to  produce  paper  are  agri-residues,  wood/bamboo  pulp,  imported  pulp  and  wastepaper  (domestic  and  imported).  
  • The  alternative  source  of  raw  material  is  wastepaper/recycled  paper  -  domestic  and  imported.  Both  together  accounted  for  nearly  40  per  cent  of  the  total  paper  production.  In  India,  however ,  the  system  of  wastepaper  collection  is  not  very  well  developed  in  the  domestic  wastepaper  segment.  The  recovery  rate  is  low  and  consequently  there  is  lower  availability .  This  leads  to  domestic  mills  relying  increasingly  on  imports  to  meet  their  demand. 
  • The  third  alternative  source  of  raw  material  for  the  paper  industry  is  agri-residues  such  as  bagasse,  wheat  and  rice  straw ,  wild  grass  and  other  such  agricultural  wastes.  Bagasse  is  the  most  widely-used  agri-residue  in  the  paper  industry .  However ,  availability  of  bagasse  has  been  declining  due  to  its  increased  use  in  power  generation  by  sugar  industry . 
  • Further ,  the  changes  in  Government  policies  and  the  paperless  initiatives  taken  by  the  Govt.  of  India,  coupled  with  Green  initiatives  in  Corporate  Governance  leading  to  paperless  compliances  by  the  companies,  is  indicative  of  a  slight  threat  to  the  paper  industry .  Although  India  does  not  import  any  significant  quantity  of  W&P or  paperboard,  the  share  of  imports  over  the  next  few  years  to  remain  a  key  monitorable,  particularly  in  W&P
  • The  paper  industry  consumes  a  large  amount  of  energy  and  water .  Energy  costs  account  for  about  16-18  %  of  costs.  Energy  costs  vary  depending  on  the  fuel  used  for  generating  power .  The  cost  of  power  has  increased  as  a  result  of  inadequate  supply  and increase in tarif f for industrial consumers.  The prospect of availability of good quality fuel is diminishing. However, the company  has  got  itself  registered  with  Coal  India  Limited  and  has  entered  into  a  Fuel  Supply  Agreement  and  has  been  meeting  part  of  its  requirements  in  the  co-generation  plant  through  procurement  of  coal, thus  mitigating  the  cost  increase  to  some  extent.

Industry Structure and Development:

Global  paper  demand  is  expected  to  grow  at  a  muted  pace  of  upto  1  %  CAGR  over  the  next  5  years,  largely  owing  to  slower  economic  growth  in  China  (W orld's  largest  consumer)  as  well  as  proliferation  of  digitization,  especially  in  developed  nations.  Amongst  the  three  segments  of  W&P ,  paper  board  and  news  print;  paper  board  will  emerge  as  the  growing  segment,  albeit  at  a  slower  pace  than  past  5  years.  On  the  other  hand,  the  global  paper  consumption  of  W&P paper  and  newsprint  is  expected  to  decline  by  0.5-1%  and  4-4.5%  CAGR  respectively  during  2017-2021  period.  The  demand  for  W&P paper  is  likely  to  be  impacted  by  rising  e-book  penetration,  proliferation  of  smartphones  and  advent  of  online  advertising  and  social  media,  whereas  expected  fall  in  newspaper  circulation  will  drive  down  the  demand  for  newsprint.

On  the  other  hand,  India  is  the  fastest  growing  market  for  paper  globally .  Despite  the  continued  focus  on  digitization,  India's  demand  for  paper  is  expected  to  continue  to  rise  in  the  next  few  years,  primarily  due  to  a  sustained  increase  in  the  number  of  school  going  children  in  the  rural  areas.  Growing  consumerism,  modern  retailing,  rising  literacy  and  continued  Govt.  spending  on  education  through  the  'Sarva  Shiksha  Abhiyan'  as  well  as  the  increasing  use  of  documentation  will  keep  demand  for  writing  and  printing  paper  buoyant.

Company's Financial Performance & Analysis:

During  the  year  your  Company  has  achieved  the  highest  ever  production  of  paper ,  which  was  1,15,997  metric  tonnes,  as  against  1,07,632  metric  tonnes  in  the  previous  year .  The  quantitative  figure  for  the  sale  of  paper  was  1,15,724  metric  tonnes  this  year ,  leaving  a  closing  stock  of  470  metric  tonnes,  as  against  the  sale  of  1,07,834  metric  tonnes  in  the  previous  year .

The  company  has  recorded  a  fabulous  performance  in  its  working  results.  This  excellent  performance  is  due  to  the  improved  operational  ef ficiencies,  productivity ,  quality ,  higher  volumes  of  premium  quality  paper  products  like  copier  and  surface  sized  paper ,  and  increased  sales  realizations.

The  company  recorded  a  gross  sales  turnover  including  other  income  at  Rs.  64,646.72  lacs,  up  by  16.56%;  operating  profit  at  Rs.  1 1,915.36  lacs,  up  by  81.68%,  Profit  before  T ax  at  Rs.  8,487.09  lacs,  up  by  158.17%  compared  to  the  previous  year .  Net  profit  after  tax  is  up  by  148.46%  and  stands  at  Rs.  6,091.35  lacs.

The  initiatives  taken  by  company  in  the  recent  years  in  improving  productivity  and  efficiency  have  led  to  achieving  the  above  operational  performance. The  company  has  continued  to  take  up  projects  in  focused  areas  for  improvement  under  “KITE”  scheme  -  Improvement  Projects  (Kuantum,  Innovate,  Think  &  Execute)  and  this  has  led  to  improved  operational  efficiencies,  productivity ,  reduction  in  operational  costs,  and  sizeable  increase  in  savings  thereby  substantially  improving  the  bottom-line.

The  results  of  cost  reduction  initiatives  and  operational  ef ficiencies  will  continue  to  be  more  visible  in  the  current  financial  year  2017-18  as  your  company  has  continued  these  initiatives  to  optimize  capacity  utilization,  cost  reduction,  new  products,  optimizing  production  of  better  margin  products  by  further  undertaking  modification  and  up-gradation  of  the  paper  machines  and  other  equipment  for  improving  the  product  quality  and  operations.

These  initiatives  have  made  your  company  one  of  the  most  cost  competitive  paper  mills,  but  is  also  placed  among st  the  large  player  in  the  writing  and  printing  segment.

Final Points on Company improvement:

  • The company not used DG for power generation from last year, which was about 1.2 cr of power cost
  • Company generated own power generation (lacs KWH) of 1052.75 compared to last year of 976.75
  • Company reduced electricity per tonne from 1198 KWH to 1154, YoY
  • Company reduced coal usage (MT) per tonne from 0.636 to 0.343, YoY
  • The R&D Division of Company has been recognized by Department of Scientific and Industrial Research  (DSIR), Ministry of Science and Technology, Govt. of India and certified by ISO: 9001:2008
  • The company continues it  focus on waste minimization, value addition & product recovery from different  waste  streams  like  biogas  generation  from  waste  stream  of  wet  washing  of  agro  raw  material.  Primary  sludge  from  ETP and  other  waste  from  mills  are  utilized  in  board  manufacturing.  Secondary  sludge  from  ETP is  being  degraded  with  the  help  of  bio-cleaner.
  • Energy Saving Measures taken this year:
    • Replacement of inefficient  pumps and agitators with efficient ones.
    • Replacement of old and higher energy consuming light with efficient LED lights.
    • Installation of auto day / night on-of f and Motion  Sensors.
    • Efforts have been made to reduce energy losses by reducing number of bends in pipelines.
    • To increase the availability of natural light, replacing asbestos sheet with  transparent roof top  sheets.
    • Wherever possible, to reduce the power consumption, VFDs  have been installed.
    • To prevent heat loss, in the phased manner ,  insulation work on steam pipe is undertaken.
    • To reduce or avoid manual operation and to enhance automation, sensors have been installed  and linked with DCS and PLC.
    • Power generation of Turbine No. 2 optimized.
    • To reduce wastage and higher consumption of water , wherever possible,  pumps with auto  level controls are installed.

Future plans

The company has chalked out future plans for the coming 5 years which are as mentioned below:
  • The company plans to set up chemical recovery plant for an environmental friendly process.
  • It plans to install captive power plant based on bio-mass fuels with 10 MW of capacity.
  • Company wants to increase its manufacturing capacity from 140 TPD to 250 TPD.
  • The company plans to establish a wood based pulp plant of 60TPD capacity.

Conclusion:

So seeing the companies past performance, Counting the company cost reduction initiatives, considering the opportunities and threats, Looking in to the future plans, the companies stock price seems undervalued and have a potential to appreciate minimum 50% to multibagger on the long-term perspective.

http://www.kuantumpapers.com/Home
http://www.kuantumpapers.com/Innovation
http://www.kuantumpapers.com/CompanyProfile
http://www.kuantumpapers.com/PlantFacility
http://www.kuantumpapers.com/BoardofDirectors
http://www.kuantumpapers.com/Certifications

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