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.
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.
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
Very good information shared
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