Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Tamil Nadu Newsprint or JK Paper - Which is better? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jun 4, 2012

    Tamil Nadu Newsprint or JK Paper - Which is better?

    News about Coal India falling short of its production targets have been making headlines for quite some time now. How does this Coal India news impact the paper industry? And how will this influence investing in paper companies. Read on...

    This is the first of a series of three articles reviewing which of Tamil Nadu Newsprint (TNPL) or JK Paper (JKP) one should consider investing in.

    The paper industry in India seems like a relatively conservative area for investment. However, India still consumes much less paper than the rest of the world. So, there is significant potential for growth.

    With this environment in mind, in this first article we discuss these companies basic and innovation strategies, their product portfolio and revenue mix, and their approach to raw material acquisition.

    Strategies - Growth and Branding

    TNPL was established by the Government of Tamil Nadu and started producing paper in 1984. The company started by producing paper used for printing newspapers, and writing paper.

    Recognizing the changing market dynamics away from lower margin newsprint, and the increasing competitive scenario, the company began to shift its focus away from newsprint. It has ventured into new product areas, and now has a wider product portfolio offering.

    For TNPL, growth has come inorganically through capacity additions. From an initial capacity of 90,000 million tonnes (MTs) per annum in 1985, it has moved to a significant 4 lakh MTs per annum in 2012. During the past five years, TNPL's capacity has grown around 75%.

    JK Paper has strategically amplified its efforts towards the high growth segment of value added paper. Value added paper means adding additional elements such as coating to the paper, or high quality paper that are priced higher and provide customers with more utility than the normal paper. Value added products are not just margin additive by nature, but also help in differentiating one company's products from its peers. For JKP value added products are as much as 95% of its overall revenue of JKP - and so its primary focus.

    Innovation has also been a critical part of JKP's strategy. The company is the first to successfully brand paper in Indian market. It has also been a pioneer in launching a number of papers like surface size wood-free paper among others.

    JKP's annual production capacity stands at 2.4 lakh MTs as at the end of 2011. There has been no capacity addition at all in the last 5 years as compared to TNPL's 75% addition in capacity over the same period.

    Product portfolio and revenue mix

    While TNPL continues to produce paper for newsprint, its product portfolio now also includes writing paper, paper for printing, industrial paper and some value added and other papers.

    For writing papers, the company manufactures paper stationery such as notebooks. For printing, its products are for sheet-fed, web offset, and digital printers.

    TNPL exports 20% of its total production. TNPL's products are sold globally in over 30 countries including Algeria, Armenia, Berlin, Egypt, Indonesia, Turkey and Yemen.. Going forward too, TNPL's efforts will be to strengthen export sales. While this opens up new markets and diversifies its risk, this export strategy also makes it more susceptible to any changes in the economic scenario of these countries.

    JKP's focus is branded valued added paper which is 95% of its portfolio. Its product offerings include branded cut-size papers, uncoated & coated fine papers, and value-added packaging boards. JKP also produces and specialty products like MICR paper used in cheques and water-marked bond paper.

    JKP produces paper primarily for the Indian markets. Of course, this links JK Paper's results to our domestic growth and consumption.

    While branding may command higher prices, it also increases expenses. In such a scenario, it is important for companies to keep innovating and introducing differentiated products.

    Securing raw material supply

    Paper is made out of bagasse (TNPL) or wood (JK Paper). Since the supply of both these inputs is limited in India, it becomes crucial to ensure a steady supply through long term contracts.

    But first consider the impact of sky-rocketing energy costs and specially the situation with Coal India.

    Coal remains India's most important fuel, and is predominantly (71%) used to generate electricity. Most of the coal is consumed by the power sector (64% for utility and 7% for captive consumption) in India, followed by steel (11%), cement (3%) and others (15%).

    India is the third-largest coal producer internationally, with an annual output of 533 million tonnes (mt) in FY11. In spite of this globally significant amount of production, India cannot meet its own domestic demand, and depends on imports to fill this gap.

    Paper companies need power to run their factories, and so will also experience the challenge of increasing coal costs.

    Paper manufacturers usually get into coal linkages with Coal India to source their coal needs. However, due to the unavailability of coal domestically they have to import higher priced coal from Europe or buy it from open market at higher prices. This adversely impacts the paper companies' earnings.

    For other input requirements TNPL mainly uses sugarcane waste 'bagasse' which is renewable as raw material in its production process. In fact, it has the largest bagasse based paper unit in India. Bagasse is used as a fuel in sugar mills but is not easily available for other regular uses. For paper making, bagasse is required in large quantities. For procuring bagasse, TNPL has a unique barter system with sugar mills who supply TNPL with bagasse in exchange for steam.

    Further, TNPL has implemented a novel bio-methanation plant. Methane gas generated from bagasse wash water is used as a fuel in lime kiln. And a power boiler replaces furnace oil and solid fuel respectively. Bagasse consumes a very low amount of chemicals, and the effluents are less harmful. The usage of bagasse helps to conserve over 30,000 acres of forest land annually. Also, producing with bagasse is more economical.

    TNPL has also initiated a research programme with the Sugarcane Breeding Institute (SBI), Coimbatore to develop alternate fibrous raw material for bagasse.

    JKP has two integrated pulp and paper plants. One of these JK Paper Mills is in the East in Odissa, and is strategically located close to wood raw material sources. The other Central Pulp Mill is in the West at Songadh in Gujarat, and is near to key western India markets. JK Paper which uses wood pulp to make paper has tied-up with farmers to put their less productive land under farm forestry. And, JKP also provides the farmers' financial assistance to encourage them to take up plantations in their rain fed fallow lands.

    So where are we in our comparison of TNPL and JPK?

    We feel that the company that emerges the winner in the long run will be the one that has the right strategies, the right mix of domestic and international product offerings, has its raw material arrangements in place, and is innovative, competitive and agile.

    The Paper industry in India is highly capital intensive by nature and so having a strong balance sheet is also important.

    In our next article, we will discuss the financial parameters and balance sheet numbers of JKP and TNPL to add to our knowledge of which company to invest in.

    TN Newsprint or JK Paper - Next Articles



    Equitymaster requests your view! Post a comment on "Tamil Nadu Newsprint or JK Paper - Which is better?". Click here!


    More Views on News

    Sorry! There are no related views on news for this company/sector.

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms