Dec 13, 2011|
BILT Vs TN Newsprint: Commoditised profits?
The paper sector in India has not seen any major developments in the recent past. The deal of International Paper with Andhra Pradesh Paper mills brought about investor interest in the sector again. We know that India still consumes very less amount of paper as compared to the rest of the world. This provides room for growth in the industry that is closely related to the GDP growth of the country. With the Indian economy expected to do well, do the conservative paper stocks offer reasonable returns over the next few years? We will try and find out with the help of a comparative analysis on the two major paper companies Ballarpur Industries (BILT) and Tamil Nadu Newsprint (TNPL). .
TNPL was established by the Government of Tamil Nadu and started producing paper from the year 1984. The company produces newsprint (paper used for printing newspapers) and printing and writing paper. It 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. Of the total production of TNPL, 20% is exported.
BILT, on the other hand is the largest manufacturer of writing and printing paper in India. The company has 7 manufacturing facilities; six in India and one in Malaysia. BILT is managed by one of the largest corporate groups in India - The Thapars. The company belongs to the Thapar's Avantha group of companies that has other business interests in the form of chemicals, energy and infrastructure, food processing, IT and power equipment.
The key to surviving and being profitable in a commodity related business lies in product differentiation and exploring newer markets. For this, BILT ventured into the office stationery segment (both paper stationery and non paper stationery). Looking at the potential of the paper tissue business in India, the paper company started manufacturing tissues as well. The acquisition of Sabah Forest Industries has helped BILT get access to the South East and East Asian markets.
As stated earlier the ratio of exports to total sales for TNPL stands at a substantial 20%. BILT exports 14% of its total production. The company exports to around 80 countries globally. Thus while the demand is largely domestic driven, the companies continue to be susceptible to sector and economic trends.
Strategies at work
Since the pricing power is limited in a commodity business, paper companies depend heavily on volume growth. Both BILT and TNPL are therefore in an expansion mode and have been adding production capacities. Focusing on cost minimization and raw material sourcing has to some degree helped profitability. However, the same can be sustainable if growth does not come at the cost of a leveraged balance sheet. In our next article, we will have a look at the financial parameters and the balance sheet position of BILT and TNPL to decide which provides a better investment opportunity if any.
- Growth: Organic/ inorganic
TNPL has a simple orgainsation structure with no subsidiary. It has grown over the years through capacity addition. On the other hand BILT has a number of subsidiaries. To grow its business and reach other markets, it had acquired Sabah Forest Industries in 2007. From 2007 onwards the scale of revenue growth escalated for BILT (2008 saw a revenue growth of more than 20%). The company is into the business of tissue paper as well and has recently acquired Bangalore based Premier Tissues. BILT has done some corporate restructuring whereby it hived off its realty and power businesses into separate entities so that it can focus on the paper business.
- Securing raw material supply
Paper is made out of bagasse or wood. Since the supply of both these inputs is limited in India, it becomes very crucial to ensure steady supply through long term contracts. To source bagasse, TNPL follows a unique barter model under which it purchases bagasse from sugar companies in exchange of steam that it generates at its plants. TNPL has initiated a research programme along with Sugarcane Breeding Institute (SBI), Coimbatore to develop alternate fibrous raw material for bagasse. BILT has an arrangement with the farming community for sourcing of industrial wood. The main objective of the farm forestry program is to grow wood for the paper mills on a sustainable basis. To achieve this, a series of exposure visits of farmers are conducted along with a few training programs to educate them on techniques of raising plantations and yielding maximum productivity.The Sabah acquisition has also helped it in sourcing raw material.
- Innovation is the key
TNPL has implemented a novel bio-methanation plant. The methane gas generated from
bagasse wash water through the bio-methanation plant is now used as a fuel in lime kiln
and power boiler in replacement of furnace oil and solid fuel respectively. Bagasse that it uses as raw material 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 in a year and producing from bagasse is more economical. BILT too continuously innovates its products and production processes.
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