Cmp- 211

Market Cap- 1460cr

Company Overview

TNPL has over 4 decades of experience and unedifying trust in delivering quality writing & printing paper & packaging paper products & solutions to its customers.

TNPL was commissioned in 1985 with an installed capacity of 90,000 TPA of Newsprint and Fine paper. Over the years, the Unit is now equipped with state-of-the-art automation in all three modern high-speed paper machines, producing over 700,000 TPA, making TNPL one of the prominent bagasse-based paper manufacturers across the globe.

Current Global Scenario- Shortage at 40 year highs

Ban by Chinese government on waste paper shortage has created a once in a lifetime situation wherein prices of writing & printing paper using wood pulp and agro residue is hitting decadal highs.

Waste paper, a key RM for recycled paper, has shot up significantly in last few months led by lower collections, demand coming on board due to reopening of offices & schools. Pandemic led many offices, courts and schools to remain shut for a very long period of time. As a result collections remained very low.

To add to misery EU banned exports of waste paper in Oct’21, with demand now back to normal and severe shortage of waste paper, Grade B/C mills took sharp price hikes few months back.

The biggest beneficiary of this demand supply glut will be players who have complete backward integration of their operations. TNPL, JK Paper, West Coast Paper and Andhra Paper are completely backward integrated and use wood pulp as a key RM. Hence compared to Grade B/C mills which use recycled paper as RM, their cost have not gone up significantly.

With demand now crossing pre-COVID levels and favourable pricing scenario mills like TNPL over coming few quarters. There has never been a situation in last 40 years when recycled paper manufacturer have seen such a supply glut from EU and then China.

With severe shortage of waste paper, pricing of recycled paper inched to Rs60-65/kg vs. Rs50/kg in pre-pandemic times. The prices continue to remain on inclining trend, to remain on par to recycled papers, Grade A mills too have taken price hikes. As per our channel checks atleast two hikes were taken in last two months (6-7% each).

Price hikes across all the product categories

1. Wholesale prices of Writing & Printing (W&P)  have increased from Rs39-46/kg to Rs75-80/kg yoy.
2. Coated paper prices are up 40% to Rs100/kg
3. Craft paper and board prices have increased from Rs31-3/kg to Rs27-44/kg over the same time frame.
4. Prices of news print paper, which largely uses recycled paper, have registered the biggest price movement from Rs37/kg to Rs85/kg.

Investment Rationale

Waste to wealth

TNPL is deploying world class innovation & technology not only in core manufacturing but also producing products from paper waste, creating opportunities from waste to wealth. TNPL manufactures cement from solid paper waste such as fly ash& lime sludge.

Self-reliance The solid farmer eco system has created huge captive plantation of wood pulp making it immune to volatility in Raw Material Prices.

Farm Plantation Model

1. Promoting pulpwood plantations in small and marginal farmer’s land.
2. Supplying quality seedlings/clones at subsidized price to the farm gate.
3. Providing buy back assurance with minimum support price

Expanding Farm Operational Area

        1. The plantation schemes implemented 1.9 lac acres benefitting 36,000 farmers.

        2. TNPL has given huge opportunity of livelihood to local & marginalized farmers.

        3. TNPL covers over 100 villages with its farm plantation programs.

Bagasse based Paper

Paper is made from either waste paper, agri residue or wood pulp. TNPL has zero dependence on waste paper, sugar companies have producing sugar in Tamil Nadu where in TNPL does procurement of bagasse.

Factors Driving Demand

1. Demand uptick, restocking of inventories and favourable pricing
2. Impact of pandemic receding schools, colleges, offices and courts have opened up full-fledged.
3. Uptick in demand, distributors have started stocking inventory.
4. Inflationary trend has led to higher-than-normal demand at distributor level.
5. Windfall gains can be expected for these companies over next couple of quarters as per our channel checks.
6. TNPL will benefit as they have taken the most aggressive price hikes and now in FY22 pulp mill will start commercial production which will result in substantial savings and reduce dependence on imports.

Products & Capacity Expansion

The Paper Industry is classified into four segments

1. Writing & Printing- 30%
2. Packaging- 45%
3. Speciality Paper- 10%
4. Newsprint- 15%

TNPL is present in the first 2 categories which is also the largest part of the market. Packaging, the company first forayed in 2015 and since then has done massive capex into the packaging segment.

Packaging enjoys highest margins in the industry, the premium over writing & printing is around 30%.

– Packaging EBITDA /kg – Rs19

– Writing and printing EBITDA/kg – Rs14

TNPL has expanded capacity in higher margin packaging segment

Financials

As seen in the financials, TNPL went through tough times in the past 2 years, be it COVI19 or the floods in Tamil Nadu. However, TNPL has moved beyond all the issues in the past and come out way stronger, also the current paper pricing scenario will only benefit it further.

Last 6 months, the industry has taken in multiple hikes and we have factored in only 8-10% hike for the full year FY23.

Due to the expectation of higher operating profits & cash flow, we see FY23 Debt/Equity coming down to 1x, expect repayment of 700-900 cr in the next financial year.

The expanded and old capacity has the ability to create an EBIDTA of 1,100 & PAT of 450-500 cr for FY23.

At a market cap of 1450-1,500 cr TNPL is available at a highly attractive valuation of 3x FY23 earnings.

Conclusion & Key Risks

Conclusion

Capacity expansion has come at a perfect time, the increased realization will help TNPL in paring off debt sooner than expected.

Higher realizations and pricing never seen in decades.

Recent addition in wood pulp plantation to reduce dependency on exports and further reduce costs.

One of the largest players and cheapest valuations. At 25,000 market cap/ton, its 1/3^rd the industry leaders i.e. JK PAPER & West Coast.

Key Risks

Water scarcity in the past has caused TNPL plant to shut down.

Complete Coal tie ups by leading players like JK Paper & West Coast can cause significant production risk. TNPL is making efforts in doing similar tie ups.

The new capacity didn’t have complete wood pulp integration till 6 months back. Management is claiming they have done complete backward integration of the plant with regards to pulp. We need to closely track this, whether TNPL is ready for commercial production.