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Tamil Nadu Newsprint or JK Paper - Which is better? - Views on News from Equitymaster
 
 
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  • 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

     

     

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