TN Newsprint or JK Paper: The Final call - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

TN Newsprint or JK Paper: The Final call

Jun 18, 2012

This is the third and final article evaluating which if any of TN Newsprint (TNPL) or JK Paper (JKP) one should invest in.

In our first article we discussed TNPL and JKP and their business models, innovation and other strategies, their product offering as well as their approach to raw material management.

We highlighted the fact that while TNPL's product offering is broad based, JKP is focused on value-added products. And we pointed out the critical different raw material inputs with TNPL using bagasse which can be managed more easily than wood which JKP uses. As a result, we indicated how the availability and pricing of wood poses a challenge to JKP.

We also observed that over the past five years TNPL had added production capacities whereas JKP had not.

We also pointed out that the Paper industry is highly capital intensive, and how it is imperative that companies in that space support their strategies and operations with strong balance sheets. So, in our second article we reviewed the financials of both companies.

From our analysis, we inferred that TNPL was outperformed by JKP slightly on all most key financial parameters. However, in terms of net profits, TNPL (13%) was significantly worse than JKP (25%). A key reason for this is that TNPL has relatively higher interest costs than JKP primarily because TNPL has, and continues to plan to add capacity where as JKP has not increased capacity.

In this article we study how both these companies fare in terms of a few other financial ratios, and finally current valuations.

Return ratios

TNPL has been adding more capital to fund its organic growth which is evident by identifying that the company's capital employed has grown by a CAGR of 24% during the last 5 years. However, with resulting higher interest costs, its net profit (profit before tax) grew by only 14%. So its Return on Capital Employed (RoCE) dropped from 14.8% in 2007 to 10.5% in 2011. On the other hand, JKP's capital requirements grew at a CAGR of only 3% over a 5 year period (due to no capacity additions), and so JKP was able to clock in a higher net profit before taxes CAGR of 22%. And for JKP, RoCE has moved higher from 10.9 in 2007 to 18.8 in 2011.

Further, during the past 5 years, TNPL's Return on equity (RoE) has increased marginally from 16% to 17%. In the same 5 year period, JKP's, RoE has moved from 13.3% to 20% over past 5 years.


Valuations

TNPL is currently trading at a standalone trailing twelve month (TTM) Price to Earnings ratio (PE) of 6.4 times, and JKP is trading at a TTM PE of 6.5 times. This implies that both the paper companies are currently trading at similar valuations.

Financials: TNPL Vs JKP over past 5 years
FactorTamil Nadu Newsprint LimitedJ K Paper
Strategy  
Growth strategyOrganic growth through capacity additionsFocus on value added products
Productsnewsprint, writing paper, paper for printing, industrial paper, value added paperdifferent types of value added paper
Raw material supplyProcures bagasse from sugar mills in exchange for steamHas a tie-up with farmers under farm forestry programme to procure wood
Revenues  
Net Revenues in 2011Rs 11.84 bnRs 12.30 bn
Revenue CAGR- 5 years8%10%
Revenue MixExports make up 20% of revenuesMore than 95% revenues from value added products
Last 5 yrs' Average Profit Margins  
Operating13%14%
Net Profit13%25%
Debt to Equity (last 5 years average)1.271.52
Valuations  
TTM PE (x)6.436.53

So which company do we invest in?

TNPL and JKP have very different business models and strategies. TNPL's growth is dependent on its broad product base, exports and adding capacity efficiently whereas JKP has a focused value-added products strategy that requires no product capacity addition.

And importantly, the two company's raw material inputs are fundamentally different (TNPL's being bagasse, and JKP's wood). Given all these considerations, we recognize that TNPL's net profits are not as good as JKP's, though the valuations of the two companies are similar.

However, we feel that in the long run, the winner will be the company that utilizes its raw material more efficiently. So far, TNPL has not derived much benefit from its advantage of using and managing the supply of bagasse, but going forward, the rising cost of wood may chop off some of JKP's profits.

TN Newsprint or JK Paper - Previous article

Equitymaster requests your view! Post a comment on "TN Newsprint or JK Paper: The Final call". Click here!

1 Responses to "TN Newsprint or JK Paper: The Final call"

suresh

Oct 25, 2012

The most important consideration in this business is the availability of 'sustainable' raw material, and i think this is where TNPL scores over JK. There is a real risk associated with farm forestry going into the future, and is unsustainable. TNPL needs scale business given the product mix it has in it's portfolio, and that combination would be good bet for investments.

Like 
  
Equitymaster requests your view! Post a comment on "TN Newsprint or JK Paper: The Final call". Click here!

More Views on News

N.R.AGARWAL 2020-21 Annual Report Analysis (Annual Result Update)

Nov 22, 2021 | Updated on Nov 22, 2021

Here's an analysis of the annual report of N.R.AGARWAL for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of N.R.AGARWAL. Also includes updates on the valuation of N.R.AGARWAL.

TAMIL NADU NEWSPRINT 2020-21 Annual Report Analysis (Annual Result Update)

Nov 19, 2021 | Updated on Nov 19, 2021

Here's an analysis of the annual report of TAMIL NADU NEWSPRINT for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of TAMIL NADU NEWSPRINT. Also includes updates on the valuation of TAMIL NADU NEWSPRINT.

JK PAPER Announces Quarterly Results (1QFY22); Net Profit Up 3818.0% (Quarterly Result Update)

Aug 3, 2021 | Updated on Aug 3, 2021

For the quarter ended June 2021, JK PAPER has posted a net profit of Rs 1 bn (up 3818.0% YoY). Sales on the other hand came in at Rs 7 bn (up 40.8% YoY). Read on for a complete analysis of JK PAPER's quarterly results.

JK PAPER Announces Quarterly Results (1QFY21); Net Profit Down 81.6% (Quarterly Result Update)

Aug 24, 2020 | Updated on Aug 24, 2020

For the quarter ended June 2020, JK PAPER has posted a net profit of Rs 250 m (down 81.6% YoY). Sales on the other hand came in at Rs 5 bn (down 34.9% YoY). Read on for a complete analysis of JK PAPER's quarterly results.

More Views on News

Most Popular

SWOT Analysis for Stocks

SWOT analysis guide for investors in the Indian share market.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

How to Hit Rs 100 Crore Wealth in Your Lifetime (Equitymaster Wealth)

Nov 15, 2021

This is how you can achieve the ambitious goal of a net worth of Rs 100 crore.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

COMPARE COMPANY

MARKET STATS