Indian Paper Sector

06 August 2018

Consolidation is inevitable, only the pace is in question

Bhakti Thacker
+91 (22) 6136 7421
[email protected]
Mukul Kochhar (Specialist Sales)
Readers in all geographies please refer to important disclosures and disclaimers starting on page 130. In the United Kingdom this document is a MARKETING COMMUNICATION. It has not been prepared in accordance with the rules in the +91 (22) 6136 7431
FCA Conduct of Business Sourcebook designed to promote the independence of research and is also not subject to any prohibition on dealing ahead of the dissemination of research. The global contacts include: Andrew Fitchie (EU) and Leon [email protected]
van Heerden (SA). Full analyst and global contact details are shown on the back page.

Page 1 | 06 August 2018

Consolidation is inevitable, only the pace is in question Company Rec Target
After a few years of stress, the paper industry in India is now well placed. With growth, excess capacity has
JK Paper Buy INR220
been absorbed, and companies have backward integrated through farm forestry to secure raw material
Tamil Nadu Newsprint & Papers Buy INR431
(supply). Imports, which were an increasing threat, are reducing, owing to 1) a depreciating rupee 2) high
West Coast Paper Mills Hold INR334
realizations for paper globally and 3) the threat of imposition of anti-dumping duty. Finally, solid balance
sheets with the stronger players, increasing cost of environmental compliance and economies of scale imply
that the industry is well placed to consolidate around the leaders.
 The Indian paper industry is in a sweet spot, as increasing global paper prices have provided an umbrella for
raising domestic prices, even as backward integration for wood\pulp locally, through farm forestry has been highly
successful. With international pulp prices strong, and a more disciplined global industry, we expect the upswing
to be sustainable in the medium term.
 It is also the fastest growing major paper market in the world – registering CAGR of ~8% from 2011-2016 vs 1%
for the global paper industry. Writing/ printing paper & paperboard are the two larger & more profitable segments
in the sector, with ITC (4.1% market share), JK Paper (2.6% market share) and TNPL (2.4% market share), being
the 3 largest players in the country.
 While India is a fast growing market, it is also highly fragmented - the top-3 players account for only 9% market
share, vs 68% in USA, 72% in Indonesia, and 21% in China. The current setup is ideal for a measured
consolidation, as viable stressed assets get acquired and healthy players gain market share through inorganic
expansion. As is the experience in other markets, we expect this process be gradual, and the winners to create
reasonable value for shareholders.
 The current cyclical upturn in India has come after a period of substantial stress. While only ~2 years old, the
upturn has been substantially profitable for the larger players with balance sheet repair in place, and heavy annual
free cash flow generation ongoing. Bhakti Thacker
+91 (22) 6136 7421
 We prefer companies with raw material security, and a strong balance sheet which are well placed to acquire
[email protected]
available stressed assets. We initiate on JK Paper - JKPL (BUY; TP Rs 220), Tamil Nadu Newsprint & Papers -
Mukul Kochhar (Specialist Sales)
TNPL (BUY; Rs 431) and West Coast Paper Mills - WCPM (HOLD; Rs 334).
+91 (22) 6136 7431
 JKPL is inarguably one of the best (top-3) paper companies in India, and best positioned to be the choice [email protected]
consolidator in the industry. TNPL, another high quality paper company has suffered a drop in profitability owing
to water shortage, and we bet on normalization. WCPM has built one of the better paper brands in the country,
but we are watchful owing to past history of unrelated diversification.

Page 2 | 06 August 2018

1. Attractive industry dynamics
India is the fastest growing major paper market in the world
Volume Projected CAGR
India’s
[mn tons – FY17] [2021/2017]
Products segmental Players
Market Share
Global India Global India

Newsprints 46.6 2.6 -2.8% 1.0% 15% NR Agarwal, Shree Rama Newsprint

Writing and printing

25.8 0.8 -0.5% 6.0% 5% Ballarpur Industries, JKPL
paper - Coated Paper

Writing and printing TNPL, WCPM, IP APPM, JKPL,

54.2 4.3 -0.3% 3.7% 25%
paper - Uncoated Paper Emami Paper, Seshasayee

ITC, TNPL, WCPM, Emami Paper,

Paperboards - Virgin 0.8 12.9% 5%
JKPL
43.7 2.0%
Paperboards - Recycled 3.2 7.1% 19% ITC, TNPL

Industrial Paper incl. Astron, Ruchira, Genus Paper, South

165.7 4.8 2.2% 9.1% 28%
Kraft Paper India Paper, Shree Ajit Pulp & Paper

Century textiles, Ballarpur Industries,

Tissue paper 33.6 0.1 3.2% 15.5% 1%
Orient Paper

Specialty paper like

Cigarette Paper, Décor 36.7 0.5 -1.0% 7.5% 3% ITC, WCPM
Papers

Total 406.3 17.1 1.0% 6.3% 100%

Source: JK Paper, Investec Securities estimates

Page 3 | 06 August 2018

There are solid, sustainable reasons behind high growth (1/2)
India is the fastest growing paper market
 Globally, India is the fastest growing paper market – 5-year (FY11 -
10% (5 year CAGR % FY11 to FY16)
FY16) CAGR of consumption is 8% vs. World at 1%. China and Indonesia
8%
have grown at 1% CAGR, and developed markets of USA & UK have 8%

declined at 1% and 3% CAGR in the same period respectively]. 6%

 Paper demand grows in tandem with GDP growth rate in a country. Over
4%
the last 10-yr period (2006-2016), India’s paper demand grew 8.1%,
whereas GDP CAGR was 7.3%. Thus, we believe India’s high GDP 2% 1% 1%
0%
growth rate ensures that base demand growth for paper is high. 0%
India China Indonesia USA UK Germany
 Moreover, not unlike a lot of other commodities, paper usage per capita
-2% -1%
in India lags most other major economies - 13 kg pa, vs 150-250 kg pa
-3%
for more developed countries – see chart below. -4%

Source: FAOSTAT, Investec Securities estimates

High GDP growth in India underpins high demand for paper India has one of the lowest per capita consumption of paper
Real GDP growth (YoY%)
9 250
8.1 8.2
7.8 7.9
8 7.4
7.1
7 6.7 200

6
150
5
3.6 3.7 3.7 3.7 3.8 3.8
4
3.2
100
3

2
50
1

0
0
World India Germany USA Japan Korea Italy UK China Mexico Brazil India
2016 2017E 2018E 2019E 2020E 2021E 2022E
Source: World Bank, Investec Securities estimates Source: World Bank & FAOSTAT, Investec Securities estimates

Page 4 | 06 August 2018

There are solid, sustainable reasons behind high growth (2/2)
TCPL’s revenue growth reflects high paper packaging spend
 Combined with rapidly improving literacy rates and increasing office
7,000 Net Sales (in Rs mn.)
documentation needs, we expect demand growth in writing & printing
paper in India to continue [Literacy rate improved to 75% in 2016 from 6,000

63% in 2001].
5,000
 Packaging paper & board demand growth is driven by base demand
4,000
growth in FMCG, Consumer durables and Pharma [5 year CAGR 2011-
2016 of 9.2%, 11.4% and 5.6% respectively]. 3,000

 In addition, higher value coated paper demand is growing at a faster pace

2,000
with premiumization.
1,000
 Finally, high growth rates in e-Commerce (Amazon/Flipkart) should be
another strong driver for sustained packaging paper demand. -
2012 2013 2014 2015 2016 2017

Source: IBEF, Investec Securities estimates Source: Company, Investec Securities estimates

Text book publishers in India witnessing reasonably strong growth e-Commerce – another strong driver of packaging paper demand
12,000 Net Sales in (Rs mn.) 250

10,000 200
200 188
8,000

150
6,000

4,000 100

64
2,000
50
50 39
0 20
14
2012 2013 2014 2015 2016 2017 2018
Navneet Education S Chand & Company 0
Details for S Chand & Co. prior to FY12 not available 2014 2015 2017 2018F 2020F 2025F 2026F

Source: Bloomberg, Investec Securities estimates Source: IBEF, Investec Securities estimates

Page 5 | 06 August 2018

This cycle is different from last few years
Capacity Utilisation (%)
120%

110% 106%
102% 102% 103%
97% 100%
98% 98% 96%
100% 95% 94%
93%
89%
89%
90%
82%

80%

70%

60%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
JKPL WCPM TNPL* IP APPM Seshasayee# Weighted Average

*TNPL's production loss of of 10,557 tonnes in FY17 & 46,041 tonnes in FY18 owing to water shortage has been added to reflect capacity utilisation in normal circumstances.
# Seshsayee also lost production in FY18 owing to water shortage, however,volume details are not available.

Source: Company, Investec Securities estimates

 By FY10, the paper industry was capacity starved, and had already undertaken substantial steps to expand capacity. Over FY10 – FY14, paper capacity in just
the top 5 firms shot up from 954,000 tons to 1,591,000 tons. Notably, JKPL added 215,000 TPA, TNPL 155,000 TPA and WCPM added 140,000 TPA. As per
Seshasayee Paper & Boards Ltd’s FY18 annual report - “The industry saw significant capacity additions of 1.6 million MT during FY09 - FY11 (~15% of domestic
paper capacity in FY09) particularly in the printing and writing paper segment.” This led to over-supply scenario, build-up of inventories together with pricing
pressures.
 The first signs of trouble came when the paper industry found itself struggling for local raw material – new capacity was brought online without securing local raw
material. Companies were unable to pass through higher raw material costs to consumers, and fixed cost absorption was low. As a result, the industry, by and
large, suffered substantial losses (please see page 19, where we provide details of stress in the industry).
 We believe this past experience has taught the industry important lessons, and our conversations with companies convince us that subsequent capacity
expansions will be measured, with companies securing raw material before embarking on any expansion. This should set grounds for healthier, profitable growth.
 The importance of securing raw material, water, and access to markets will also allow for inorganic growth through acquisition of stressed companies with good
access to raw materials. In that respect, we are fairly excited by JKPL’s acquisition of Sirpur Mills, which our channel checks reveal, ticks all the relevant boxes of
raw material availability, water, and access to markets.

Page 6 | 06 August 2018

 2. Indian paper industry is ripe for consolidation
We believe that the highly fragmented Indian paper industry will consolidate [especially in segments of writing & printing paper]

 High Capital Intensity - Investment in land and machinery for paper mills, repairs and maintenance of mills, cost of upgrading technology, cost of environmental
compliance, growing wood plantations and establishing a distribution network, all make manufacturing paper a capital intensive task. Adding to the woes, the
industry is cyclical. Thus, small players might not be able to keep up with heavy investments that are required to make them competitive.

 Economies of scale - The average capacity of an Indian Paper Mill is about 21,373 TPA, which is less than 1/5th of the average capacity of European mills, and
about 1/9th the size of the average US mill. (FAO, IPMA and Fisher International). The water, power and chemical requirements for paper production reduce as the
mills grow larger; e.g. Water consumption by JKPL’s Orissa unit reduced from 86 m3 in FY11 to 42 m3 in FY17 as the mill grew larger.

 Typically, smaller sized mills make technology upgradation difficult, resulting in inefficiency in production, and inconsistency in quality.

 Imports will pressure inefficient players more – The looming import threat makes cost efficiency key, and in the past few years, multiple smaller paper mills have
become non-operational.

 It is expensive to be environmentally compliant - The pulp and paper industry is among the world’s largest producers of water pollutants and waste products.
This makes the industry heavily regulated, and requires heavy investment from companies to be environmentally compliant. CPCB has classified Pulp and Paper
industry into the Red category, which means environmental clearance for new factories would be strict. Also, emission monitoring systems needs to be installed.

 Advent of GST – GST has been introduced at 12-18% for most paper categories. This implies that the margin cushion available to small companies (likely tax
avoiding) may be pressured; this along with the high cost of environment compliance should drive the industry towards consolidation.

 Industry Stress − Multiple inorganic opportunities are available in India, which can help large players with strong balance sheets consolidate.

 As seen in other countries, the Indian paper industry too should consolidate. Companies that are positioned to benefit from this consolidation will create substantial
value for their shareholders. If we take the example of the US, consolidation will also allow the industry to weather cycles better, as companies are able to regulate
supply to changing demand better.

Page 7 | 06 August 2018

Fragmented industry, augurs well for consolidation - Top 3 players account for a mere 9%
Highly fragmented industry Paper industry in USA, Indonesia and China is more concentrated
The Indian paper industry is highly fragmented with >1000 mills, of which about
 The market share of large players in India is low as compared to the
750 mills are operational. Top 3 players account for only 9% of the market
paper industry in USA, China, and Indonesia.
Production Volumes (TPA) FY16 % of Total India's Market  In US, ~75% of the paper market is controlled by the top-4 players.
ITC 0.7 4%
 The largest 2 players in Indonesia - sister companies, controlled by the
JK Paper 0.4 3%
same group - control ~ 60% of Indonesia’s paper market. The next
TNPL 0.4 2%
player represents another 12% of Indonesia’s paper production.
West Coast Papers 0.3 2%
 The share of large Chinese players has increased due to permanent
International Paper APPM 0.2 1%
shutdowns of smaller domestic mills which were not environmentally
Others 15.0 88%
compliant. As a result, the top-3 players in China control ~21% of the
India 17.0 100%
overall market.

Source: Company, FAOSTAT, Investec Securities estimates Source: Company, FAOSTAT, Investec Securities estimates

Indian paper companies are small even when measured by market cap India is the most fragmented major global market in the world
30.0 FY16 Production volumes (in mn TPA) Market Cap (in USD mn.) 25,000
USA (total 70m tons) Indonesia (total 7m tons)
25.0
20,000
32% 28%
20.0
15,000 68% 72%
15.0
10,000
10.0
China (total 109m tons) India (total 17m tons)
5,000
5.0 9%
21%

0.0 0
JK Paper Indah Kiat Nine Dragons International Paper 79% 91%
India Indonesia China USA
Share of Top 3
Others
Production Volume [LHS] Market Cap [RHS]
Share of Top 3 Others
Source: Company, Investec Securities estimates Source: Company, FAOSTAT, Investec Securities estimates

Page 8 | 06 August 2018

Consolidation in the USA was gradual
Slowing growth & lack of discipline in a fragmented industry prompted consolidation in the US
100  In the US, challenging market conditions forced players to consolidate to
US paper consumption (in mn TPA)
90 reduce costs. In addition, growth slowed, as the economy slowed.
80
 In 1995, there were 215 companies with 114 mn tonnes capacity, which
70
had reduced to 125 companies with 96 mn tonnes in 2015.
60
 Declining/stable paper demand, and thin profit margin drove M&A activity
50
in all segments, except specialty paper.
40
 Since 2008, 818 M&A deals have taken place in pulp, paper and
30
packaging in USA.
20
 Consolidation has reduced cyclicality of earnings, and improved
10
profitability for the remaining companies, as they have more control over
0
1986 1991 1996 2001 2006 2011 2016 pricing.
Source: Company, FAOSTAT, Investec Securities estimates Source: Company, FAOSTAT, FACTSET, Investec Securities estimates

Market share change in the North American containerboard segment - instructive of consolidation in the overall industry

Changes in larger players since 1995

1995 2016
 Stone container and Jefferson Smurfit merged in 1998. In Jan 2009, the
Packing
Stone Corp of merged company “Smurfit-Stone” was forced to file bankruptcy and in
America,
Container, 13%
9% May 2011, Rock-Tenn bought the company.
Temple International
Inland, 7% paper, 32%  In 2015, Rock-Tenn merged with MeadWestvaco to form WestRock.
WestRock, 22%
Others, 50% Jefferson
Smufit, 7%
 In 2018, Kapstone agreed to be acquired by WestRock.
Weyerhaeuser,  In 2012, Temple-Inland was acquired by International paper.
7%
Georgia  In 2006, Weyerhaeuser spun off its fine paper business to Domtar and in
Georgia International Others, 27% Pacific, 10%
Pacific, paper, 7% 2008, it announced sale of containerboard packaging & recycling
9%
business to International Paper.

Source: Company, Bloomberg, Investec Securities estimates Source: Company, Investec Securities estimates

Page 9 | 06 August 2018

Consolidation in China - primarily owing to new environmental norms
On the other hand, environmental crackdown is driving further consolidation in the Chinese paper industry

 China witnessed permanent closure of smaller non-compliant domestic mills

Share of top 3 players and others to China's paper consumption (%)

using non-wood or recovered fibres. “During 2017-18, capacities close to 3 lac
100% TPA were shut down in China due to lack of environmental compliance. Indian
90%
manufacturers using waste paper stand to benefit on account of lower global
80%
waste paper prices due to excess availability” – JKPL’s FY18 annual report
70%
 “The continued closure of non-compliant capacities will bring potential to the
60% 79%
88% 84% packaging paper industry - Nine Dragons Paper (Holdings) Limited - Interim
50%
Report 2017/2018”. Thus, additional mill closures are also expected.
40%
 China also revised import licensing regulations to prevent paper mills below
30%
50,000 tonnes per annum capacity from applying for import permits of
20%
recovered paper.
10% 21%
12% 16%
 The government has not granted licenses to start greenfield paper mills (and
0%
FY08 FY12 FY16 associated power plants) for the past few years.
Top 3 Players Others
 Thus, with the exit of smaller players and no entry of new players, large
compliant players with access to resources continue to grow, and gain market
share in China.

Source: Company, FAOSTAT, Investec Securities estimates Source: Company, Investec Securities estimates

Page 10 | 06 August 2018

Capital intensive industry, with inherent economies of scales
 The paper Industry is highly capital intensive with heavy investments in land and machinery for paper mills. Also, repairs and maintenance of mills, cost of
upgrading technology, cost of environmental compliance and establishing distribution network, all make manufacturing paper a capital intensive task. From the
table below, one can see that the industry is one of the most capital intensive in India, with fixed asset turns being lower than most sectors, other than metals &
mining. Further, working capital use in the industry is above average. High asset intensity infers an advantage to companies with better access to capital, and
ability to put up larger more efficient plants.

Fixed Asset Turns FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Consumer Discretionary – Autos 3.9X 2.8X 3.5X 3.4X 3.5X 3.2X 2.9X 3.0X 3.0X 3.1X
Consumer Staples 2.9X 2.8X 2.9X 2.7X 2.8X 3.0X 3.0X 3.0X 2.7X 2.7X
Cement 1.4X 1.2X 1.3X 1.1X 1.2X 1.2X 1.1X 1.1X 1.1X 1.1X
Construction 5.7X 5.8X 5.9X 3.5X 3.3X 3.3X 3.2X 3.1X 3.4X 3.4X
Chemicals 2.1X 2.5X 2.2X 2.1X 2.4X 2.2X 2.2X 2.2X 2.0X 1.9X
Industrials 4.1X 3.9X 3.7X 2.9X 2.7X 2.4X 2.1X 2.1X 2.1X 2.0X
Oil & Gas 3.2X 2.5X 2.3X 2.2X 2.8X 2.8X 2.8X 2.3X 1.6X 1.5X
Metals & Mining 1.9X 1.7X 1.4X 1.3X 1.2X 1.0X 0.8X 0.8X 0.6X 0.7X
Pharma 2.2X 2.2X 2.1X 1.5X 1.5X 1.6X 1.6X 1.5X 1.7X 1.5X
IT Services 5.6X 5.5X 5.5X 3.7X 3.6X 3.7X 3.8X 3.7X 4.2X 4.2X
Paper 1.0X 1.0X 0.8X 1.0X 1.0X 1.0X 1.0X 0.9X 0.8X 0.9X
Average 2.7X 2.5X 2.5X 2.1X 2.1X 2.0X 1.9X 1.8X 1.7X 1.7X

Working Capital Turns FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Consumer Discretionary – Autos 1032.7X 144.1X -38.0X -54.1X -87.1X 394.7 -37.6X -318.5X 106.5X -193.2X
Consumer Staples 5.5X 5.9X 6.8X 6.4X 6.7X 8.2X 7.2X 7.1X 5.4X 5.2X
Cement 9.3X 7.8X 10.0X 9.7X 9.1X 8.1X 6.7X 6.5X 6.9X 7.5X
Construction 3.0X 2.7X 2.6X 2.7X 2.7X 2.3X 2.2X 2.0X 2.0X 2.0X
Chemicals 3.7X 4.4X 4.0X 4.2X 3.6X 2.9X 2.1X 3.0X 2.7X 2.8X
Industrials 5.3X 5.3X 5.0X 4.5X 4.2X 3.5X 3.2X 3.1X 3.2X 2.9X
Oil & Gas 7.2X 10.8X 7.6X 8.9X 8.6X 9.0X 10.9X 15.5X 14.6X 12.3X
Metals & Mining 3.3X 6.6X 6.3X 4.4X 4.9X 3.8X 3.9X 3.6X 3.9X 4.4X
Pharma 2.4X 2.2X 2.4X 2.4X 2.8X 2.7X 2.5X 2.8X 2.6X 2.5X
IT Services 4.0X 4.1X 4.0X 5.2X 5.3X 4.9X 5.3X 5.7X 3.9X 4.0X
Paper 3.0X 3.3X 4.0X 3.7X 3.8X 4.7X 4.5X 4.2X 4.6X 4.3X
Average 4.6X 4.9X 5.0X 4.9X 5.0X 4.4X 4.3X 4.3X 4.0X 4.0X
Source: Company, Investec Securities estimates

Page 11 | 06 August 2018

Increasing cost of environmental compliance
 The pulp and paper industry is among the world’s largest generators of air and water pollutants, waste products and the gases that cause climate change. Thus,
heavy investment is required by companies to be environmentally compliant. Multiple norms have been introduced over the years, which have covered Paper
Manufacturing companies –

CREP, 2003 CWRPP, 2012 CWRPP (Ganga Basin National Charter

States), 2015 (in Pipeline)

 Corporate Responsibility for Environment Protection (CREP) had some key action points - utilization of treated effluent wherever possible, reduce wastewater
discharge to less than 140 m3/tonne of paper by 2005, etc. “With the implementation of the CREP, the Indian paper industry has witnessed huge investments in
last 3 years (2006-09), more than the total investments in the industry from 1960 to 2006” – WCPM, 2009 Annual Report.
 Following the positive outcome of CREP, CPCB came out with ‘Charter for Water Recycling & Pollution Prevention in Pulp & Paper Industries’ (WRPP) in 2015,
specifically for the Ganga river basin states. The charter not only highlighted the Best Available Techniques (BAT) based on European Union’s BREF document,
but also laid down stringent water consumption, effluent generation and effluent characteristics norms for the industry to be achieved in two phases, i.e. short term
goal (by March 2016) and long term goal (by March 2017). These timelines have been extended.
 National Charter is in the pipeline. Large mills have already incurred capex to adopt environmental friendly technologies and thus, would not have a huge impact.
However, this will impact smaller mills, forcing some to shut down.
 Central Pollution Control Board (CPCB) advises the Central government on matters concerning air & water pollution. It has classified pulp and paper in the Red
category, which means environmental clearance for new factories would be strict.

 Recently, environmentally non-compliant paper mills were issued closure notices by CPCB. The following companies, received closure notices in 2017 &18.
− Shahjahanpur Paper & Board pvt. ltd. − Ashoka Pulp and Paper pvt. ltd. − Vishal Paper tech India ltd.

− Ballavpur Paper Manufacturing Ltd. − Banwari paper mills pvt. ltd. − Madhubati papers pvt. ltd.

− Vishal Paper tech India ltd. − Ramchander Straw products ltd. − Bajaj Kagak Udhyog

− Kohinoor Paper & News Print pvt. ltd − Modinagar Paper Mills ltd.

Source: CPCB GOI, Sustainabilityoutlook, Investec Securities estimates

Page 12 | 06 August 2018

Increasing imports from global mills is driving efficiency in India
Imported Qty (in ’000 tons) 10 Year Proportion of
5 Year CAGR Largest exporter
HSN Paper type CAGR FY18 total
[FY13-18] in FY18
FY08 FY13 FY18 [FY08- 18] Paper imports

4801 Newsprints 894.8 1,240.8 1,448.0 3.1% 4.9% 38.9% Russia - 35%
Coated with plastic and other
4811 53.1 239.4 251.2 1.0% 16.8% 6.7% USA - 22%
inorganic substances
4810 Coated paper & board - China Clay 250.6 491.0 1,109.9 17.7% 16.0% 29.8% China - 37%

4802 Uncoated Paper & board 45.2 84.4 349.4 32.8% 22.7% 9.4% Indonesia - 50%

4804 Uncoated Kraft Paper & board 57.2 153.2 226.1 8.1% 14.7% 6.1% USA - 37%

80.8 180.1 339.9 13.5% 15.5% 9.1%

Total 1,381.6 2,388.9 3,724.5 9.3% 10.4% 100.0% China - 16%

Source: Dept of Commerce, Investec Securities estimates

 Imports of coated paper used for printing [4810] have increased at CAGR of 17.7% from FY13 to FY18. Of these, China constituted 37%, USA 15% and Korea
14% of total coated paper imports in FY18.
 Imports of uncoated paper [4802] have increased at CAGR of 32.8% from FY13 to FY18. Indonesia accounted for 50%, China 9%, and Singapore 6% to uncoated
paper imports in FY18.
 Increasing competition from imports will force inefficient domestic companies to consolidate to achieve better economies of scale.

Page 13 | 06 August 2018

India remains an attractive market for global paper supply
Imports grew at 9.3% CAGR from FY13 to FY18
 India is the fastest growing major paper market in the world.
 An appreciating rupee made imports attractive in FY17
 Anti-dumping duties were imposed by US in 2016 & 2017, which led to
diversion of supply from US to Indian markets.
 Free Trade Agreements with ASEAN & South Korea led to an increase
in exports at 10Yr CAGR of 15% and 8%, respectively.
 Even though this dynamic may change as the rupee depreciates\anti-
dumping duty is effected, open imports have already forced companies
to increase cost efficiency\consolidate.

Source: Dept of Commerce, Investec Securities estimates

India is the fastest growing major paper market in the world  
Appreciating rupee led to sharp jump in imports in FY17
(INR/USD)
10% (5 year CAGR % FY11 to FY16) 69

8% 68
8%

67
6%
66
4%
65
2% 1% 1% 64
0%
0% 63
India China Indonesia USA UK Germany
-2% -1% 62

-3% 61
-4%
Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17

Source: FAOSTAT, Investec Securities estimates Source: Bloomberg, Investec Securities estimates

Page 14 | 06 August 2018

Advent of GST should hasten consolidation process
HSN Paper Product GST Rates Excise Duty MVAT Impact The advent of GST will increase costs for
4801 Newsprints 5% 0% 6% -1% the unorganized, tax evading players as
4810 Coated Paper & Paperboard 12% 6% 6% 0% they come under the tax net. The margin

4802 & 4805 Uncoated Paper & Paperboard 12% 6% 6% 0% cushion due to tax evasion will no longer be
available to tax evaders and thus, GST will
4803 & 4818 Tissue Paper 18% 13% 6% -1%
provide a level playing field.
4804 Kraft Paper 12% 6% 6% 0%
Source: CBEC, Investec Securities estimates

Page 15 | 06 August 2018

Inorganic acquisition opportunities abound, as many companies are in distress
 2 out of 3 paper mills in India have already been closed. [As per IPMA]
 Agro or secondary fibre-based paper plants were commissioned with the support of government fiscal policies and second hand imported machinery in the 1980s.
These mills now find themselves unable to modernise, given high costs involved, and have shut down.
 Ballarpur Industries (BILT) was the largest paper manufacturer in India. BILT made significant debt-financed investments to modernise, and scale up capacities.
Some of these investments took longer than targeted to come on stream. In addition, the domestic paper market became far more competitive, because of increased
imports. These conditions have forced the company into debt restructuring.
 26 out of approximately 50 paper companies listed on BSE have stressed balance sheets.

Company Name Location Capacity Company Name Location Capacity

Rainbow Papers Ltd. Gujarat 466,700 Agio Paper & Industries Ltd. Chattisgarh 15,500
Sirpur Paper Mills Ltd. Telangana 138,300 Coral Newsprints Ltd. Uttar Pradesh 12,600
Servalakshmi Paper Ltd. Tamil Nadu 109,500 Ashutosh Paper Mills Ltd Uttar Pradesh 12,000
Mysore Paper Mills Ltd. Karnataka 105,000 B.K. Duplex Board Ltd Punjab 12,000
Magnum Ventures Ltd. Uttar Pradesh 85,000 Soma Papers & Industries Ltd. Maharashtra 10,000
Sree Sakthi Paper Mills Ltd. Kerala 75,000 B.J.Duplex Boards Ltd. Uttar Pradesh 10,000
Shree Bhawani Paper Mills Ltd. Uttar Pradesh 72,000 Simplex Papers Ltd Maharashtra 9,000
Rama Paper Mills Ltd. Uttar Pradesh 61,000 Saurashtra Paper & Board Mills Ltd. Gujarat Details N/A
Nath Pulp & Paper Mills Ltd. Maharashtra 50,000 Victory Paper & Boards (India) Ltd. Kerala Details N/A
Aurangabad Paper Mills Ltd. Maharashtra 32,340 Kalptaru Papers Ltd. Gujarat Details N/A
Kay Power and Paper Ltd. Maharashtra 25,000 Solid Containers Ltd. Maharashtra Details N/A
Saffron Industries Ltd. Maharashtra 21,780 Chadha Papers Ltd. Uttar Pradesh Details N/A
Vapi Enterprise Ltd. Gujarat 19,000 Shree Vindhya Paper Mills Ltd. Maharashtra Details N/A
Source: Company, Investec Securities estimates

Page 16 | 06 August 2018

3. Which players to back?
Integrated pulp mills with water security are better placed
Global pulp prices trending upwards
 Pulp cost constitutes approx. 33% of net sales.
 Global pulp prices have been strong in FY18 due to unscheduled mill
downtime and slower than expected ramp up of new capacity and no new
capacity announcements (It takes minimum 2 years post announcement to
get new capacity in the market).
 Consolidating pulp market will lead to further tightening. Fibria & Suzano,
which are the 1st (18% of total pulp market) and 2nd largest producers
(10%) of eucalyptus pulp in the world have agreed to merge.
 As global pulp prices increase, so do global paper prices, which helps
integrated paper manufacturers improve profitability.
 Weakening INR also leads to expensive imports of pulp and wood chips.

Source: Bloomberg, Investec Securities estimates

Water availability is imperative

 Water is imperative at each stage of production, and can lead to loss of Company Source Constraint
machine days in case of shortage. While JK Paper and WCPM have no
JKPL River Nagavali, River Tapi No
issues in sourcing water for plant, TNPL faces water scarcity due to poor
rainfall and River Cauvery disputes. WCPM River Kali No
 Efficiency in water consumption has improved with as low as 40 cubic mtr
TNPL River Cauvery Yes
required by most mills.
 In the past 20 years, TNPL has lost minimum 264 machine days due to
water shortage. TNPL is using water reservoirs to store water.
Source: FAOSTAT, Investec Securities estimates Source: Bloomberg, Investec Securities estimates

Page 17 | 06 August 2018

Paper industry in India operates in clusters – driven by water & raw material availability
Ruchira

“Approximately 72% of the total installed capacity

Star Paper in India is concentrated in Andhra Pradesh, Gujarat,
Kuantum
Odisha, Karnataka, Maharashtra and West Bengal”
Shreyans – JKPL [Annual Report FY18]
Industries
Himachal Genus Paper
Pradesh
Trident
Punjab
Uttarakhand
Haryana

Orient
Century
Uttar
Pradesh

Astron paper Gujarat

Madhya
Pradesh West Bengal Emami
Rama Newsprint

Odhisha

N R Agarwal Sirpur
Maharashtra
ITC
Telangana

IP APPM JK Paper
Ballarpur West
Industries Coast
Karnataka Andhra
Pradesh

TNPL
Tamilnadu
Seshasayee

Source: Company, Investec Securities estimates

Page 18 | 06 August 2018

Pulping capacity, power and raw material availability analysis
Integrated Required Pulping Actual Pulping Integration Raw Material
Company Paper Capacity Captive Power
Pulp Capacity* Capacity levels Constrained?
WCPM 320,000 ✓ 256,000 232,000 91% ✓ -
JKPL 455,000 ✓ 364,000 276,000 76% ✓ -
ITC 742,000 ✓ 593,600 350,000 59% ✓ -
TNPL 600,000 ✓ 480,000 377,600 79% ✓ Water
IP APPM 241,000 ✓ 192,800 181,500 94% ✓ Labour
Seshasayee 187,000 ✓ 149,600 115,000 77% ✓ Water
Ballarpur Industries 856,000 ✓ 684,800 420,000 61% ✓ Labour
Orient Paper 135,000 ✓ 108,000 62,000 57% ✓ Water
Trident Group 175,000 ✓ 140,000 125,000 89% ✖ -
Century Textiles 413,810 ✓ 331,048 193,320 58% ✖ Overhaul
Emami Paper 335,000 ✖ - - - ✓ -
NR Agarwal 306,000 ✖ - - - ✓ -
Kuantum 109,500 ✖ - - - ✓ -
Shreyans Industries 94,000 ✖ - - - ✓ -
Ruchira Papers 85,800 ✖ - - - ✓ Overhaul
Genus Paper 215,000 ✖ - - - ✖ -
Astron Paper 119,000 ✖ - - - ✖ -
Shree Rama Newsprints 132,664 ✖ - - - ✖ Labour

Source: Company, Investec Securities estimates

*Assuming 0.8 tonnes Pulp required for 1 tonne of Paper and 320 days to convert daily capacity into annual capacity

Page 19 | 06 August 2018

Amongst the majors, JKPL has been the most proactive in securing raw material supply
Paper manufacturing requires three main raw materials – Fibre, Water and Power along with capital

To make 1 ton of paper, requirement of JKPL WCPM TNPL

Wood / Bagasse 2 / 4 tons Adequate Some Constraints Some Constraints

Water 50 m3 Adequate Adequate Some Constraints

Energy 1150 units Adequate Adequate Adequate

Source: Company, Investec Securities estimates

Companies with access to wood from farm forestry will benefit from declining/ stable domestic wood prices
 While global pulp prices are increasing, domestic wood prices are
300 Area under farm forestry (in '000 hectares )
declining due to increased farm forestry efforts of paper companies.
253
250  In 2013 & 2014, when wood prices shot up due to shortage, many
farmers were motivated to cultivate wood plantations. These plantations
200
164 have now hit the market, leading to increased supply.
150 133  Owing to closure and slowdown in operations of few mills, the demand
121
for wood has remained soft.
100 89 82
 JKPL sources 85% of its fibre requirements from farm forestry, WCPM –
49
50 30 60%. TNPL is mainly dependent on government auctions for its wood
16
8 requirements. Bagasse is a larger portion of fibre requirement for TNPL.
0
JKPL WCPM TNPL IP APPM Seshasayee It is facing some shortage in sourcing of bagasse, which we expect will
As on FY12 As on FY17 improve.

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Page 20 | 06 August 2018

Companies with captive power plant have ability to plan production schedules and reduce
power cost
Sufficient Power producing capacity achieved
 Steam in huge quantities is essential input for the paper manufacturing
process. Paper plants, therefore, need to install a boiler to ensure a 200 Power Capacity as at FY17 (MW)

continuous flow of steam. With the high cost of power directly affecting 180
profits of paper industries, the best option is to install own captive power 160
plants to manage production schedules without unplanned downtime and 140
lower costs. 120
 JKPL, WCPM and TNPL all have captive power plants. Power efficiency 100
has also improved over time. 80
 Power cost as a % of net sales is higher for TNPL as it includes cost for 60
sourcing bagasse in exchange of steam. 40
 JKPL and WCPM use mainly wood whereas TNPL uses 60% bagasse, 20
30% wood and 10% waste paper and thus, its cost of materials 0
consumed was lower than others till FY18. However, costs increased in JKPL WCPM TNPL

FY18 as bagasse shortage was faced in south. Source: Company, Investec Securities estimates

 Drought in south has impacted sugar production; impacting bagasse

availability. Further, sugar mills use bagasse for captive power
generation.
 We expect this increase to normalise over the next few years.

Page 21 | 06 August 2018

Low cost of funds is a competitive advantage, favouring Top 4-5 players
Investment grade credit ratings
 Credit Ratings of JKPL & WCPM improved on back of improving ratios
and strong balance sheets. However, ICRA maintains a negative outlook Credit Ratings Outlook
Long Short Rating
Term Term Agency
on TNPL as it faced raw material availability issues.
JKPL Positive A+ A1 CRISIL
 As gearing becomes comfortable, we expect these players will be able to
raise capital in future for their expansion plans at low cost. WCPM Stable A A1 CARE

 Debt cost was highest for JKPL [11.8%], followed by WCPM [11.6%] and TNPL Negative A A2+ ICRA

then TNPL [9.1%] in FY18.

 History of promoters bringing capital to the company during tough times
in JKPL & WCPM provides confidence to lenders.

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Comfortable gearing ratios will help companies raise capital at low cost WCPM and JKPL promoters have contributed growth capital in past
3.0 Net Debt/Equity (x)

No. of Shares Issue Amt Contributed

2.5 Company Year Required for
issued Price (Rs Mn)

2.0 FY09 26,17,650 85.0 223 Expansion

FY10 30,00,000 45.0 135 Expansion

1.5
WCPM
FY10 23,73,578 48.5 115 Expansion
1.0
FY13 33,00,000 54.3 179 Debt Repayment
0.5
FY06 76,90,000 69 531 Expansion
JKPL
0.0 FY16 1,19,10,000 42 500 Debt Reduction
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
JKPL WCPM TNPL
Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Page 22 | 06 August 2018

4. What could go wrong?
Companies overinvesting is a risk, as in the past (FY11-FY12) Simultaneous expansions in FY11 & FY12 impacted profitability

 Increase in paper producing capacities in FY11 and FY12 were not 450 Capacity Additions (in '000 tonnes p.a)

backed by increase in wood plantations. 400 60

 This led to sharp increase in wood prices which companies were not 350
67
able to completely pass-on due to excess paper supply. 300

 Profits were severely impacted for leveraged companies. 250

155
 Some mills had to discontinue their operations: 200

− Sirpur Mills 150

− Mysore Paper Mills 100 200

21 165
16 140
50
− Rainbow papers 60 50
6 30
0 15
− Hindustan Paper Corporation FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
JKPL WCPM TNPL IP APPM Seshasayee
Source: Company, Investec Securities estimates

Material cost increased sharply due to domestic wood shortage Profitability suffered & companies found it difficult to service debt

85% Raw Material & manufacturing cost (as a % of Net Sales)* 30% EBITDA Margin (%)

80%
74% 25%
75% 73% 22%
72% 22%
70% 66% 19%
70% 68% 67% 67%
20%
17% 18% 18% 18%
67% 66% 69% 15% 16%
63% 17% 16%
65% 62% 63% 14% 15%
15% 13%
12%
60%
10%
55%

50% 5%

45%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 0%
JKPL WCPM TNPL IP APPM Seshasayee Average FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
(*excludes Employee, General & Admin, Selling & Distribution and Misc exp)
JKPL WCPM TNPL IP APPM Seshasayee Average
(Cost breakdown not available for FY18 as all annual reports are not available)

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Page 23 | 06 August 2018

Can it happen again?
Imports also increased sharply leading to excess supply Can it happen again?

5,000 (Import volumes in mn TPA) (YoY growth rates %) 50%  The recovery in the paper cycle is recent. Our interactions with
4,500 companies indicate that the management of most companies have
40%
4,000
30%
become cautious post the downturn in FY14.
3,500

3,000  Although there is demand, companies intend to ensure raw material

20%
2,500 security prior to expansions.
10%
2,000
 The industry is consolidating around stronger players. This dynamic
1,500 0%
1,000
brought discipline in the market in the US, and we expect a similar
-10%
500 dynamic to play out in India.
- -20%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
 A depreciating rupee, and threat of anti dumping duty mitigates the
Qty imported (LHS) Growth Rates (RHS)
incremental threat from imports, somewhat.
Source: Department of Commerce, Investec Securities estimates

Multiple capacity expansions have been announced, however, we believe they will take 3-4 years to hit the market
Company Capacity Additions announced (in TPA)
ITC Value Added Paperboard - 150,000, Specialty paper - Decor 20,000

JK Paper Paperboard - 200,000, Pulp – 160,000

Trident Group WPP - 182,500

TNPL WPP - 165,000 , Pulp – 146000*

Emami Paper Paper board - 180,000, WPP - 142,000

Seshasayee Paper - 88,000, Pulp - 30,000

Ruchira WPP - 125,000, Pulp - 110,000

Genus Paper Leased Kraft Paper - 75,000, Greenfield - 300,000

*400 TPD Source: Companies, Investec Securities estimates

Page 24 | 06 August 2018

Companies have just started making returns, and we expect a sustainable upturn
Companies have started making reasonable RoIC; & we expect it to Solid international pulp prices should support writing & virgin packaging
sustain… paper prices
20% ROIC (%) 1,250 (Pulp Prices USD/ton)

1,150
15%
1,050
11% 11% 950
10%
10%
8% 9%
7% 7% 7% 7% 850
6% 7%
5%
5%
4% 750
3% 3%
650

0% 550
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
450
-5% Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18

JKPl WCPM TNPL IP APPM Seshasayee Average Europe Pulp BHKP PIX Index USD Europe Pulp NBSK PIX Index USD

Source: Company, Investec Securities estimates Source: Bloomberg, Investec Securities estimates

… driven by margin stability as paper realizations remain strong, and Indian paper prices as measured by paper WPI have remained strong
domestic raw material availability adequate
30% EBITDA Margin (%) (India WPI - Paper for Printing & Writing)
130

25%
22% 125
22%
19%
20%
17% 18% 18% 18%
15% 16% 120
17% 16%
15% 14% 15% 13%
12%
115
10%
110
5%

105
0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
100
JKPL WCPM TNPL IP APPM Seshasayee Average Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18

Source: Company, Investec Securities estimates Source: Bloomberg, Investec Securities estimates

Page 25 | 06 August 2018

Companies have just started making returns, and we expect a sustainable upturn
Why is this upturn sustainable?
Consolidated Hardwood pulp market
 Global pulp prices are sustainable with no new capacities expected to hit the market and a consolidating pulp
supply. This will underpin strength in global paper prices. Most printing and writing papers have composition more
Fibria, 18%
associated with hardwood than softwood fibres [Fibria website].
Hardwood pulp market is fairly consolidated with top 5 players together controlling 50% of total capacity. With
Others, 50% Suzano, 10%
merger of top 2 players Fibria and Suzano, 4 players will control 50% market. This will allow companies to manage
CMPC, 9%
supply to reduce volatility in global pulp prices.
APRIL,
8%
Arauco,
 Adequate availability of domestic wood - It usually takes 3-4 years for eucalyptus plantations to grow. In 2013 & 6%
2014 when wood prices shot up due to shortage, many farmers were motivated to cultivate wood plantations. These
Source: Bloomberg, Investec Securities estimates
plantations have now hit the market, leading to increased supply and softening of domestic pulp prices.

 Paper capacity in India is rationalizing & consolidating, especially in writing & printing paper. There is more
discipline in adding capacity now than before, and pricing is more controlled. Multiple capacity additions are being
made in the packaging segment. However, companies and industry experts believe this addition is in line with
double digit demand growth.

 Prospect of anti-dumping duty is already having an impact on imported paper. With the Rupee depreciating, the
gap between imported paper prices and domestic paper prices has narrowed down.

Page 26 | 06 August 2018

Ongoing anti-dumping investigations could provide incremental relief
S. Korea paper imports grew at 10Yr CAGR 8% ASEAN paper imports grew at 10YR CAGR 15% Contribution to segments

450 (Paper exports by Korea in mn TPA) 500 (Paper exports by ASEAN countries in mn TPA)

400 450

350 400

300 duties reduced under FTA 350

300
250
250 duties reduced under FTA
200
200
150
150
100
100
50 50

0 0
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E

Source: Dept. of Commerce, Investec Securities estimates

 Wood cost for South-East Asian countries is much lower than Indian mills as their government promoted wood plantations by providing generous subsidies. Further,
adoption of scientific plantation practices resulted in better yield and quality at cheaper rate. Thus, differential today is $50-60 per ton of wood.
 Adding to the woes, import duties under paper and paperboard have been progressively reduced since 2011 under ASEAN - India FTA. The basic customs duty of
paper products were reduced to nil for most products from Jan 2014. [major beneficiaries were Indonesia, Thailand and Malaysia].
 Similarly, India - Korea CEPA progressively reduced customs duty since 2009 and fully exempted since Jan 2017.
 Anti-Dumping investigation concerning imports of “Coated Paper” originating in or exported from China PR, European Union & USA has been initiated on 23rd Jan
2018.
 Similar investigation concerning imports of “Uncoated Copier Paper” originating in or exported from Indonesia, Thailand and Singapore has been initiated on 2nd Nov
2017.

Page 27 | 06 August 2018

Anti-dumping and Anti-subsidy duties imposed by US & EU
USA has also imposed anti-dumping duty… Coated paper imports reduced in the US post anti-dumping duty
3.5 (US Coated paper imports in mn tons)
Importing Year of original Validity till
Products
Country imposition date?
3.0
Canada Newsprints 2017 Yes
Australia Certain Uncoated Paper 2016 Yes 2.5

Brazil Certain Uncoated Paper 2016 Yes

2.0
China Certain Uncoated Paper 2016 Yes
Indonesia Certain Uncoated Paper 2016 Yes 1.5

Portugal Certain Uncoated Paper 2016 Yes

1.0
China Coated Paper 2010 Yes
Indonesia Coated Paper 2010 Yes 0.5

China Tissue paper 2005 Yes

0.0
India Certain Lined Paper Products 2006 Yes 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: WTO and news, Investec Securities estimates Source: FAOSTAT, Investec Securities estimates

…. As has, EU Coated paper imports reduced in EU post anti-dumping duty

16.0 (EU Coated paper imports in mn tons)

Importing Year of original Validity till

Products 14.0
Country imposition date?
China Coated fine paper 2011 Yes 12.0

10.0

8.0

6.0

4.0

2.0

0.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: WTO and news, Investec Securities estimates Source: FAOSTAT, Investec Securities estimates

Page 28 | 06 August 2018

A strong case for dumping and subsidization?
RoICs of companies from exporting countries are low
 US has successfully established a case against Indonesia and China for
dumping and subsidization and thereby, successfully levied anti-dumping
Company Country FY17 ROIC
and anti-subsidization duties.
 The supply to US post anti-dumping and anti-subsidization duties have Nine Dragons paper holdings China 8.7%
come down and Indian imports have increased, indicating the shift of the Lee & Man Paper Manufacturing China 15.0%
US supply to India. Indah Kiat Pulp & Paper TBK Indonesia 7.9%
 The low RoICs of exporting companies indicate price undercutting to
Pabrik Kertas Tjiwi Kimia Tbk PT Indonesia 0.7%
enter markets.
Moorim Paper South Korea 3.5%

UPP Holdings Singapore 12.3%

Source: Bloomberg, Investec Securities estimates

Page 29 | 06 August 2018

RoICs of both domestic and global players has improved in FY17 and FY18
Domestic Players - ROIC (%) 20% Global Players - RoIC (%)
20%
18%
15%
16%
14%
12% 10%

10%
8% 5%

6%
4% 0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
2%
0% -5%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
International Paper (US) Mondi (UK) Nine Dragons (China) Indah Kiat (Indonesia) Average
JKPL WCPM TNPL Average

Source: Company, Investec Securities estimates Source: Bloomberg, Investec Securities estimates

EBITDA Margin of Chinese and Indonesian player is higher than Indian players due to low cost of raw materials. However, their RoICs are relatively lower
Domestic Players - EBITDA margin (%) Global Players - EBITDA margin (%)
30% 35%

30%
25%
25%
20%
20%

15% 15%

10% 10%

5%
5%
0%
0% FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
International Paper (US) Mondi (UK) Nine Dragons (China) Indah Kiat (Indonesia) Average
JKPL WCPM TNPL Average

Source: Company, Investec Securities estimates Source: Bloomberg, Investec Securities estimates

Page 30 | 06 August 2018

Common Size Statement
West Coast Paper
JK Paper TNPL
Company Name Mills Comments
FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY18
Net Sales 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Cost Efficiency is reflected in JK

Total Cost of Materials Paper and West Coast Paper Mills
72.9 68.3 66.4 75.4 71.0 67.9 64.6 62.8 74.9
Consumed numbers. TNPL was impacted due
to Bagasse Shortage

Gross Profit 27.1 31.7 33.6 24.6 29.0 32.1 35.4 37.2 25.1

Employee Cost 7.4 8.3 8.1 6.7 6.7 7.2 7.7 8.4 8.0
Other Expenses 3.7 3.9 3.9 3.2 3.2 3.6 4.2 4.1 4.1

EBITDA 16.0 19.5 21.5 14.7 19.1 21.3 23.4 24.7 13.1

Depreciation 4.8 4.5 4.2 6.7 6.3 6.8 5.9 7.0 7.2
EBIT 11.2 14.9 17.3 8.0 12.8 14.5 17.5 17.7 5.9
Interest Cost (Net of other
7.6 6.1 4.1 2.8 3.0 2.5 4.1 7.3 6.8
Income)

Tax 1.2 2.6 4.0 0.8 2.8 0.0 2.6 1.4 0.5
TNPL’s profits were subdued due to
PAT before Exceptional Items 2.5 6.2 9.1 4.4 7.0 12.0 10.7 9.0 -1.4
water shortage
Exceptional Items 0.0 0.0 0.0 -2.9 0.0 0.0 0.0 0.0 0.0
PAT after Exceptional Items 2.5 6.2 9.1 1.5 7.0 12.0 10.7 9.0 -1.4
Source: Company data, Investec Securities research

Page 31 | 06 August 2018

JK Paper (JKPA.NS)
JK Paper (JKPL) is inarguably one of the best (top-3) paper companies in India, having successfully navigated several paper cycles over the past few decades.
JKPL has an experienced, return focused management team, backed by a very strong industrial group, and a rock solid balance sheet. It has been proactive
in taking advantage of stress in the industry, and has successfully bid and acquired Sirpur, in a substantially accretive transaction. We initiate on JK Paper
with a BUY rating, and target price of Rs. 220, representing 47% upside.
 The paper industry is enjoying a period of good profitability (likely to continue) – EBITDA margin has expanded for 9 consecutive quarters, backed by strong pulp cycle
globally that has allowed the Indian industry to increase pricing, even as local raw material (pulp) prices have been well contained. For instance, 10 ppt of the 14 ppt
margin expansion at JKPL has been driven by leverage on pulp price, as JKPL has successfully backward integrated post experiencing pulp shortage in FY14.

 JKPL is third largest paper manufacturing company in India (based on capacity) - ITC and TNPL are largest, and second largest, respectively. It manufactures uncoated
paper, coated paper and packaging paper. The 80 year-old company has successfully navigated through multiple paper cycles with timely capacity expansions, and is
well placed to emerge strongest out of the current cycle.

 A strong balance sheet and a strong management with experience in turning around sick paper mills (Central Pulp Mills), should allow it to play the role of a choice
consolidator in the sector. JKPL has received approval for the Sirpur Mills’ (138,300 ton paper mill) acquisition, paying a reported Rs. 5,770 mn for 76% Equity. Our
channel checks reveal that Sirpur ticks all the relevant boxes of raw material, water, and easy access to markets. We estimate the transaction to be accretive by Rs
20/sh.

 JKPL has one of the best, most experienced management teams in the industry, and a brand that is able to command a premium in the market. It makes one of the
highest EBITDA margin of all companies in India (21.5% in FY18), and we expect EBITDA margin to expand further, driving PAT growth of 30% over the next 2 years.

JKPL is also embarking on expansion of 200,000 tonnes in the packaging segment together with pulping capacity of 160,000 tonnes. Thus, the Sirpur acquisition, and
organic expansion ensures that JKPL will continue growth above market rates, and take market share in a consolidating industry. Our target price of Rs 200/sh values
JKPL at 9x FY20E EPS, and adds Rs20/sh for the Sirpur acquisition (half our estimated benefit from the transaction, given risk that some benefits may not be fully realized).

Page 32 | 06 August 2018

West Coast Paper Mills (WCPM.NS)
West Coast Paper Mills (WCPM) is one of the top branded paper company in the country, which is benefitting from a consolidating industry in India, and
overseas. WCPM has successfully delevered its balance sheet over the past few years, and we expect it to be practically debt free by FY20. The management
team is one of the more experienced team in the industry, and has built a solid distribution network making it capable of quickly expanding capacity, and
sales. Valuation of 7.6% FY18 FCF yield, 10x FY18E P/E (8x FY20E EPS) is supportive, even as we expect strong cash flow to sustain. However, a track record
of unrelated diversification makes us somewhat cautious, and we initiate on the stock with HOLD rating.
 WCPM is one of the top paper companies in the country by size – it operates a 320,000 integrated paper mill, with sufficient pulping capacity, and a 75 MW power
plant. An optimal size of the plant, it is amongst the more profitable paper companies in India today – FY18 EBITDA margin of 21.2%, and RoIC of 14.7%. WCPM
also enjoys adequate supply of water, a key ingredient in paper making, ensuring a disruption free production schedule.

 We expect the paper cycle to remain buoyant, which should support profitability of top paper companies like WCPM. Over the past 2 years, WCPM has generated
over Rs.5,825.6 mn of free cash flow as it has taken advantage of the 2nd widest distribution network in the country as the paper cycle recovered.

 WCPM has successfully delevered over the past 2 years, and is practically debt free today. While a solid balance sheet positions WCPM to be one of the consolidators,
a bank default in one of the group companies has created a stumbling block in the NCLT process. This means that expansion by WCPM has to be organic, making
its desire of expanding its manufacturing footprint more challenging than its competitors. For instance, it was ruled out of the NCLT process for Sirpur Mills, which
eventually has been acquired by JKPL.

 Like the other majors, WCPM has also sought to control its supply chain for wood fibre. However, success has been somewhat mixed, and it still imports ~43% of its
requirement of wood fibre. This exposes WCPM to price volatility of fibre, which has been a key risk for the industry in the past.

WCPM is one of the top paper companies in India, and has established a good brand, and a solid distribution network. It is trading at 9.5x FY18 P/E, with solid FCF
generation capability - WCPM generated ~Rs. 1,872.3 mn FCF in FY18, a yield of 7.9% on Enterprise Value. From a valuation perspective, the stock is inarguably attractive.
However, we are cautious owing to WCPM’s propensity of unrelated diversification, and a relatively patchy track record of past acquisitions. Therefore, we initiate on WCPM
with a HOLD rating, and Price Target of Rs. 334. We will become more constructive, if we get comfort on WCPM’s capital use policies.

Page 33 | 06 August 2018

Tamil Nadu Newsprint & Papers (TNNP.BO)
Tamil Nadu Newsprint & Papers (TNPL) is the 2nd largest paper manufacturer in India, and also generates one of the highest, and most consistent EBITDA
margin amongst its peers. It is 35.3% owned by Tamil Nadu government, which is also its largest customer. TNPL’s profitability suffered in FY18 as Tamil Nadu
underwent a drought, and shortage of water impacted production, and consequently bagasse from sugar mills became costlier (to normalize by FY21). TNPL
is a professionally managed organization, and our channel checks reveal that the management team is reputed to be one of the most competent in the industry.
Unabsorbed capacity in the past has depressed returns, and expect RoIC to improve from here as production\utilization improves. We expect EBITDA margin
to expand through FY20, and TNPL to post EPS of Rs. 48.4. Applying target multiple of 9X, we get target price of Rs. 431, and assign a BUY rating to the stock.
 With 600,000 tons per annum of production capacity, TNPL is the 2nd largest paper manufacturer in India. It is also the most cost efficient producer of paper given its
access to cheap, and plentiful supply of fibre, and inhouse production of power. Barring the odd hiccup in FY18, owing to a drought situation in Tamil Nadu, it
consistently reports higher EBITDA margin than its peers.

 TNPL is 35.3% owned by the TN Government, which is also its largest customer. 25% of its paper sales are to the Tamil Nadu government. In fact, assured demand
for TNPL’s product has made it unnecessary for the company to develop an extensive distribution network. Our analysis reveals that despite being much larger than
both JKPL, and WCPM in terms of capacity, TNPL’s distribution network lags both.

 It is a professionally managed organization, and our channel checks reveal that the management is one of the more competent in the industry. The churn at the top is
a mild concern - top management is appointed by the government. However, deep mid-management strength means that processes, and longer-term strategic direction
are on autopilot, mitigating concern over instability at the top.

 Water shortage, being present in a drought prone state is a problem. TNPL is tackling the water shortage problem with increasing its reservoir capacity, and we expect
TNPL to expand its RoIC as utilization at its plant improves.

We believe that the current solid paper cycle is going to sustain, and are initiating on TNPL with a BUY, and target P/E multiple of 9X on FY20E EPS of Rs. 48.4 (TNPL’s
average forward P/E during the last cycle, FY04-FY08, which is most representative of the current cycle), to arrive at a 1-year target price of Rs. 431. Expect TNPL to
generate high incremental RoIC on existing capacity as earnings normalize beyond FY20E. In addition, TNPL is capable of generating consistent free cash flow to equity
of ~Rs300cr, which implies an FCFE yield of ~15% (FY18 FCF yield of 11.6%), providing solid support for our BUY recommendation.

Page 34 | 06 August 2018

Valuation
Price Net EPS P/E FCF
Market Cap EV EV/
Indian Companies (In INR) YTD Debt/
04/08/2018 (Rs. mn) (Rs. mn) EBITDA 2018 2019E 2020E 2018 2019E 2020E Yield
EBITDA
JK Paper 151.3 9.0% 26,959.3 37,193.7 6.1 1.7 15.3 20.8 22.2 9.9 7.3 6.8 12.6%
West Coast Paper Mills 320.6 1.8% 21,172.0 23,634.7 6.5 0.7 33.8 36.6 41.8 9.5 8.8 7.7 7.9%
Tamil Nadu Newsprint & Papers 296.8 -33.9% 20,538.2 46,219.9 11.4 6.4 -6.1 30.2 48.4 0.0 9.8 6.1 11.6%
IP APPM 393.6 24.2% 15,651.5 17,146.4 7.7 0.7 23.1 25.5 28.3 17.0 15.4 13.9 10.7%
Average 7.9 2.3 9.1 10.3 8.6

Price Net EPS P/E FCF

Market Cap EV EV/
Global Players (In USD) YTD Debt/
04/08/2018 (USD mn) (USD mn) EBITDA 2018 2019E 2020E 2018 2019E 2020E Yield
EBITDA
International Paper 52.6 -12.1% 21,486.5 31,235.5 8.3 2.6 3.5 5.1 5.7 15.2 10.4 9.2 1.3%
Nine Dragons 1.3 -22.7% 5,919.4 8,781.7 7.7 2.5 0.1 0.2 0.2 10.4 6.5 6.7 0.1%
Mondi PLC 2,906.9 15.7% 14,079.9 15,588.4 9.5 0.9 168.9 194.3 204.8 17.2 15.0 14.2 3.2%
Average 8.5 2.0 14.3 10.6 10.0
Source: Company, Bloomberg, Investec Securities estimates

Company section begins from page 39

Page 35 | 06 August 2018

Appendix

Page 36 | 06 August 2018

Type of Paper Products

Paper

Newsprints Writing and Printing

paper Packaging Specialty Papers
[17%] [46%] [7%]
[30%]

Coated Uncoated
Household & sanitary
[28%] [72%] Consumer Packaging papers [16%]

Creamwove Others
Tertiary Packaging -
[84%]
-Kraft paper

Maplitho

Copier

Source: Investec Securities estimates

Page 37 | 06 August 2018

Pulp Varieties
Pulp graded based on fibre source Pulp based on method of production

Pulp Pulp

Mechanical Semi Chemical

Wood Recycled fibre Chemical Pulp Deinked pulp
Agri Residue Pulp Pulp

Thermo–
Hardwood Sulphate (or
mechanical
Kraft) pulp
Pulp

Stone
Softwood groundwood Sulphite pulp
pulp

Source: Investec Securities Source: Investec Securities

Pulp graded based on level of processing

Pulp

Bleached Unbleached

Source: Investec Securities

Page 38 | 06 August 2018

JK Paper (JKPA.NS)
JK Paper (JKPL) is inarguably one of the best (top-3) paper companies in India, having BUY
successfully navigated several paper cycles over the past few decades. JKPL has an experienced,
return focused management team, backed by a very strong industrial group, and a rock solid Price: INR151 Target Price: INR220
balance sheet. It has been proactive in taking advantage of stress in the industry, and has Market Cap: INR27bn
successfully bid and acquired Sirpur, in a substantially accretive transaction. We initiate on JK Forecast Total Return: 47.2%
Paper with a BUY rating, and target price of Rs. 220, representing 47% upside.
2016A 2017A 2018A 2019E 2020E
 The paper industry is enjoying a period of good profitability (likely to continue) – EBITDA margin has
Revenue (INRm) 24,372.5 26,286.1 28,442.7 30,760.8 32,003.5
expanded for 9 consecutive quarters, backed by strong pulp cycle globally that has allowed the Indian EBITDA (INRm) 3,911.6 5,124.3 6,133.3 7,797.9 8,250.3
industry to increase pricing, even as local raw material (pulp) prices have been well contained. For EBITA (INRm) 2,739.4 3,929.0 4,924.5 6,493.9 6,565.5
instance, 10 ppt of the 14 ppt margin expansion at JKPL has been driven by leverage on pulp price, PBT (normalised) (INRm) 892.1 2,317.1 3,752.0 5,317.0 5,705.4
as JKPL has successfully backward integrated post experiencing pulp shortage in FY14. Net Income (normalised) (INRm) 571.0 1,620.3 25,888.0 3,695.3 3,965.3
EPS (norm. cont.) – FD (INR) 4.3 10.8 15.3 20.8 22.2
FCFPS - FD (INR) 24.7 32.3 26.8 22.3 (9.0)
 JKPL is third largest paper manufacturing company in India (based on capacity) - ITC and TNPL are DPS (INR) 0.5 1.5 2.5 2.5 2.5
largest, and second largest, respectively. It manufactures uncoated paper, coated paper and PE (normalised) (x) 35.6 14.0 9.9 7.3 6.8
packaging paper. The 80 year-old company has successfully navigated through multiple paper cycles EV/sales (x) 0.8 0.7 0.7 0.6 0.6
with timely capacity expansions, and is well placed to emerge strongest out of the current cycle. EV/EBITDA (x) 4.9 3.7 3.1 2.5 2.3
FCF yield (%) 16.3 21.4 17.7 14.7 (5.9)
Dividend yield (%) 0.3 1.0 1.7 1.7 1.7
 A strong balance sheet and a strong management with experience in turning around sick paper mills
(Central Pulp Mills), should allow it to play the role of a choice consolidator in the sector. JKPL has
received approval for the Sirpur Mills’ (138,300 ton paper mill) acquisition, paying a reported Rs. 5,770
mn for 76% Equity. Our channel checks reveal that Sirpur ticks all the relevant boxes of raw material,
water, and easy access to markets. We estimate the transaction to be accretive by Rs 20/sh.

 JKPL has one of the best, most experienced management teams in the industry, and a brand that is
able to command a premium in the market. It makes one of the highest EBITDA margin of all Target Price Basis Key Risks
companies in India (21.5% in FY18), and we expect EBITDA margin to expand further, driving PAT 9x FY20EPS + Sirpur Mills benefit of Cyclicality from falling pulp prices
growth of 30% over the next 2 years. Rs. 20/sh.

 JKPL is also embarking on expansion of 200,000 tonnes in the packaging segment together with
pulping capacity of 160,000 tonnes. Thus, the Sirpur acquisition, and organic expansion ensures that
JKPL will continue growth above market rates, and take market share in a consolidating industry. Our
target price of Rs 200/sh is based on a 9x FY20E EPS(benchmarked to global peers), and adds
Rs20/sh for the Sirpur acquisition (half our estimated benefit from the transaction, given risk that some
benefits may not be fully realized).

Page 39 | 06 August 2018 | JK Paper

Where could we go wrong?
JKPL had over leveraged in the FY13 & FY14 for expansion [In FY14, Debt to Equity rose to 2.6x] and was caught off guard in the falling cycle as multiple capacities hit the
market simultaneously. Raw materials were not secured by the industry for this additional capacity. This led to increase in cost and this rising costs were not fully passed on
due to excess supply of paper from new capacities and imports. PAT margin fell to -4.4% in FY14. However, we believe the Industry has learnt its lessons and the next stage
of expansions will be made carefully on the back of full raw material security.

What does JK Paper do?

JKPL is third largest paper manufacturer in India. It is part of the reputed JK Organization. It has two integrated paper manufacturing units – JK Paper mills, Orissa and Central
Pulp Mills (CPM), Gujarat with combined capacity of 455,000 tonnes per annum (TPA). Products include writing and printing paper [both coated and uncoated] and packaging
boards.

Page 40 | 06 August 2018 | JK Paper

Investment Positives
Key Positives Details

JKPL acquired CPM unit in 1992 through BIFR and effected its turnaround by generating profits from the second year of its operations.
In the recent past, it has bid for multiple assets at good economics. JKPL with its experienced management team and strong balance
History of successful M&A, sheet, is one of few paper companies in India capable of acquiring and turning around sick paper mills. We are encouraged by the
and a sustainable possible synergies arising from JKPL’s takeover of Sirpur Mills.
expansion plan
It also has plans to expand packaging board plant capacity by 200,000 TPA, and pulp capacity by 160,000 TPA, largely supported by
internal cash generation.

JK Paper is positioned in JKPL operates in 3 segments - Uncoated Paper [62%], Coated Paper [19%] and Virgin Fibre board [18%]. With only two players in the
the more profitable, less coated paper segment in India, and industry growth expected at 6%, JKPL is well positioned for profitable growth. Further, few players
competitive paper segments have capacity in the virgin packaging segment, which is expected to grow at 13%. [JK Paper Estimates]

JKPL has a strong brand and is able to charge a premium for its products. Its presence in multiple products along with strong network
Strong Brand with Multiple of 4000 dealers, 208 distributors, with 16 warehouses and 4 regional offices, ensures ability to operate at optimal capacity.
product offerings and a
strong distribution network JKPL has two integrated paper manufacturing units – JK Paper mills, Orissa and Central Pulp Mills, Gujarat with combined capacity of
455,000 tonnes per annum (TPA).

Being part of the diversified JK Group, JKPL is able to raise capital relatively cheaply. An investment grade credit rating, and history of
Easy access to Capital
successful capital raise for expansion projects, provide additional support. JKPL is generating solid cash flow & steadily reducing
backed by a strong
leverage. JKPL has generated ~Rs. 4,471.7 mn annual average free cash flow over the past 3 years (FY16-FY18), resulting in net debt
industrial group
reducing from Rs.20.8 bn in FY14 to Rs.10.2 bn in FY18. Net Debt/Equity is at comfortable 0.6x in FY18E.

Raw Material Security – An integrated mill with sufficiency in all major raw materials – fibre, water and power. JKPL can source 100% of wood required in Orissa
pulp, water & power mill and 60% of wood required in Gujarat mill via farm forestry. In addition, adequate water is available at both the units. JKPL has also
adequacy achieved self-sufficiency in power with its 80 MW capacity.

JKPL’s EBITDA margin has been improving owing to better realizations and lower raw material cost. In addition, JKPL has focused on
improving use of capital by steadily reducing working capital over the years – debtor, and inventory days are reducing (JKPL is sourcing
Profitability has scope for
pulp from local catchment, thus reducing inventory). We believe that the resultant improvement in profitability (Return on Capital) is
further improvement
sustainable in the near to medium term, and we expect the Company to generate 15% RoIC in the medium term, which should deliver
high shareholder return.

Page 41 | 06 August 2018 | JK Paper

History of successful turnaround & integration
Successful turnaround of Central Pulp Mills (CPM) reflects management capabilities in M&A

1960: Central Pulp Mills ltd 1988: CPML was referred to 1993: The unit Total Capacity at CPM [FY18]
(CPML) incorporated Board for Industrial & Financial turned profitable Paper – 55,000 TPA
Reconstruction (BIFR)
Packaging board – 90,000 TPA
Pulp – 61,000 TPA
1960 1975 1988 1992 1993 2001 Expansion Plan at CPM
Packaging board – 200,000 TPA
1975: It started paper 1992: JK Corp acquired 2001: JKPM unit was Pulp – 160,000 TPA
production with 40,000 TPA CPML via BIFR transferred to CPML.

Conservative management waiting for right deal Acquisition of Sirpur mills will add ~ 30% new capacity

 JKPL had shown interest in multiple assets of companies like Ballarpur  JKPL received NCLT approval for acquisition of Sirpur Mill [138,300 TPA]
Industries, Murli Industries, and Century Textiles & Industries. for Rs. 5,770 mn. [76% stake and balance 24% equity shares of Sirpur
 However, the deals were not completed due to disagreements on valuation. Mills issued to secured financial creditors]
 This would seem to reflect management’s prudent and conservative  As per industry experts, JKPL will receive benefits from Telangana state
approach. worth Rs.1,000 mn per year via cheaper wood (we calculate modestly
 It has now completed the acquisition of Sirpur Mills, which seems to be a lower benefit), SGST reimbursement, stamp duty exemptions, cheaper
very profitable transaction for JKPL. coal, capital subsidy, reimbursement of power cost, grant of degraded
land.
 The mill located in Telangana can help company sell its products in south
using its existing rich distribution network and brand.
 The acquisition will add Rs 38.9 EPS in FY20.

Page 42 | 06 August 2018 | JK Paper

Sirpur Mill’s acquisition valuation
Value of benefits of Sirpur Mills [considering 13% discount rate] (amount in INR mn)

Present
FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28
Value
Capacity Utilization 40% 50% 60% 70% 75% 80% 80% 80% 80% 80%
Benefits
100% of SGST 1,462.5 146.9 162.5 172.5 178.1 168.9 159.4 141.1 124.9 110.5 97.8
Capital Subsidy of 20% (max 50cr) 500.0
Wood at concessional rate of Rs.1,000/ton for 1.5 lacs ton 2,337.1 255.1 293.9 293.6 270.4 248.9 229.1 210.7 193.7 178.1 163.7
Coal at concessional rate of Rs. 1000/ton 755.6 75.9 83.9 89.1 92.0 87.3 82.4 72.9 64.5 57.1 50.5
2% Interest Subvention on new investment for 5 years 289.1 72.7 64.4 57.0 50.4 44.6 - - - - -
Electricity duty exemption for 10 years 137.7 13.8 15.3 16.2 16.8 15.9 15.0 13.3 11.8 10.4 9.2
Reimbursement of power cost @ Rs 3 per unit for 3 years 544.5 166.0 183.6 195.0 - - - - - - -
Total 6,026.6 730.3 803.5 823.5 607.8 565.6 485.9 438.0 394.9 356.1 321.2

Sirpur mill adds Rs. 38.9 value per share Assumptions

Rs. (in mn)

 Realisation of Rs 50,000/ton for paper sold from Sirpur Mills.
CALCULATION OF BENEFITS:
Present Value of benefits (from our calculation above) 6,026.6  Benefit from subsidised wood provided by Telangana government =
Present Value of benefits to JKPL (a) (76% of total) 4,580.2
Rs. 2,500/ton, for maximum of 1,60,000 tons of wood per annum for
CALCULATION OF VALUE OF ASSETS ACQUIRED: 10 years.
Current EV/Ton of JKPL – based on production\capacity of
455,000 tons 80,871.3  Benefit from subsidised coal provided by Telangana government =
Total enterprise value of Sirpur Mill as per current market value Rs. 2,500/ton, per annum for 10 years.
of JKPL’s capacity (138,300 tons) (b) 11,184.5
JKPL’s share in acquired Sirpur mill asset (b) x 76% = (c)  Coal requirement of 0.62 tons per ton of paper.
 Power requirement of 1,130 units per ton of paper, for which
CALCULATION OF ACCRETION TO JKPL:
Value of asset acquired (c) government will reimburse Rs 3/unit.
Less: Cost of Acquisition of 76% stake 5,770.0  Electricity duty of Rs. 0.25/unit, exempted for 10 years.
Plus: Value of Benefit Promised by Telangana government (a) 6,945.2
NPV per share (outstanding 178.2 mn shares) 38.9

Page 43 | 06 August 2018 | JK Paper

Growth opportunities - focus on profitable product mix
JKPL’s focus is on coated paper and virgin packaging board, which has few competitors, higher demand and better profitability

Product Mix
Expected Industry Market
Products Competitors Remarks
FY16 FY17 FY18 growth rates Share

Additional capacity of 200,000 TPA –

Packaging Board 19% 18% 20% 14% ITC 11%
will come onstream in 2021
A customised segment, outsourcing
Coated Paper 17% 19% 18% 6% BILT 16% helps company to offer a wider
product range.
ITC, TNPL,
Uncoated Paper 63% 62% 62% 4% IP APPM, West 23% Market share of 23% in copier paper
Coast Papers
Source: Company, Investec Securities estimates

Page 44 | 06 August 2018 | JK Paper

Company’s strong brand helps it charge a premium…
Price quotes from market reflects JKPL charges premium

Prices for 75 GSM Copier Paper – (Rs/Ream)

Company
Dealer 1 Dealer 2 Dealer 3 Dealer 4
JK paper 160 165 170 180
West Coast Papers mills 143 137 145 160
TNPL 155 145 160 160
BILT 155 140 150 160
Indonesian Brands 135 150 144 138

Source: Investec Securities estimates

Multiple product offering helps it to cater to both economy and premium segments

Packaging Boards Office Documentation Other Uncoated & Coated Paper

Brand GSM Brand GSM Brand GSM
High Finesse 'Lumina' 60 JK Max 67 JK SS Maplitho (SHB) 58-150
Pigmented Paper 70/75/80 JK Easy Copier 70 JK Parchment Paper 80-105
JK FAB Print 80-140 JK Sparkle 70/75/80 JK Superkote 80-120
JK Carry 90-120 JK Bond 70 & 90 JK MICR Cheque Paper 95
C1S Paper for Carry Bag 125-130 JK Excel Bond 70-100 JK SS Pulpboard 150-285
JK IV Board 185-360 JK CMax 72 JK Cote Chromo 170-280
JK TuffCote 190-450 JK Evervite 75 JK Cote 125-300
JK TuffPac 190-230 JK Copier 75 & 80
JK Endura 190-450 JK Copier Plus 75 & 80
JK Dark Buff 200 JK Ledger 80-90
JK Ultima 200-450 JK Cedar 80-100
JK Club Card 250-270 Cedar Digital 170-300
Source: Company, Investec Securities estimates

Page 45 | 06 August 2018 | JK Paper

Brand supported by JKPL’s strong dealer network
Location highlighted of 168 distributors of total 208 distributors, representing a strong presence in different States

3  JKPL has an extensive distribution network of 4 zonal offices, 16

Jammu & Kashmir warehouses, 208 distributors, over 4000 dealers in India.

Himachal Pradesh
 Two mill locations help JKPL efficiently manage supply of paper. [JKPM in
1 1
Punjab 5 Gujarat, CPM in Odisha and Sirpur mill in Telangana.]
Chandigarh
Haryana
2 1
Delhi1  Sirpur mill acquisition will improve JKPL’s distribution further.
Rajasthan Uttar Pradesh 2
8 13 Assam
Bihar  The company has an export outreach to 54 countries.
3
10
2 Tripura 1Mizoram
Gujarat
Madhya
7 West 1  Our dealer channel checks suggest lead time of a single day.
Jharkhand
9 Pradesh Bengal
3
Chhattisgarh Kolkata
21 2
Maharashtra Odisha
Mumbai
7
Telangana The numbers in Red reflect number of dealers presence in respective State

Andhra represents Zonal Offices in respective States

Karnataka Pradesh
20 7 represents mill location
Chennai

Tamilnadu
5
24
Kerala

Source: Company, Investec Securities estimates

Page 46 | 06 August 2018 | JK Paper

Backing by a strong promoter group, JKPL has access to cheap capital
Backing by a large industrial group assists company in capital raise Promoter shareholding @ 48% provides confidence
90 (Number of Shares held by promoter in mn) (Promoter shareholding %) 60.0%
 JKPL is backed by JK group (late Lakshmipati Singhania family), and the
80 58.0%
diversified group has been in business for over 125 years with a turnover 70
56.0%
of $ 4 billion. 60
54.0%
 Businesses include JK Tyre, JK Lakshmi Cement, JK Fenner, Umang 50
52.0%
Dairies, JK Seeds, JK Insurance, Global Strategic Technologies, CliniRx 40
50.0%
Research and Dwarkesh Energy. 30
48.0%
20
 Strong promoter group backing JKPL, ensures ready access to capital at
10 46.0%
all times.
0 44.0%
 Promoter stake has reduced on account of new shares issued on the Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18
Number of Shares Promoter holding
FCCB conversion.
Source: Company, Investec Securities estimates

Promoter has brought capital in JKPL when required Shareholding pattern as on 30th June, 2018

Amt.
No. of Shares
Year Issue Price contributed Required for
issued
(in Rs. Mn)

FY06 76,90,000 69 530.6 Expansion Public, 38%

Promoters, 48%

FY16 1,19,10,000 42 500.2 Debt Reduction

Institutions,
14%

Source: Company, Bloomberg, Investec Securities estimates Source: Company, Investec Securities estimates

Page 47 | 06 August 2018 | JK Paper

Capital cost to reduce as gearing has improved
Investment grade credit rating History of successful capital raise

Source Year Amt (Mn)

Credit Rating Long term Short term
Outlook
Agency Rating Rating Preference Shares FY02 Rs. 3,620
CRISIL Positive A+ A1
FCCB FY06 USD 5
ICRA Stable A -
Preference Shares FY06 Rs. 1,000
INDIA Ratings Stable A A1
GDRs FY06 Rs. 531

FCCB FY12 Euro 35

Rights Issue FY12 Rs. 2,462

Source: Corporate Announcements, BSE, Investec Securities estimates Source: Company, Investec Securities estimates

Gearing to reach 0.5x in FY20 Comfortable interest coverage ratio to reach 6.6X in FY20s
Net Debt (in Rs mn) Net Debt to Equity Ratio (x) Interest (in Rs Mn) Interest coverage ratio (x)
22,000 3.0 2,200 9.0

20,000 2,000 8.0

2.5 1,800
18,000 7.0
1,600
16,000 6.0
2.0 1,400
14,000 5.0
1,200
12,000 1.5 1,000 4.0
10,000 800
3.0
1.0 600
8,000
2.0
400
6,000
0.5 1.0
200
4,000
0 0.0
2,000 0.0 FY04 FY05 FY06 FY07 FY08* FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Interest (LHS) Interest Coverage Ratio (RHS)
Net Debt (LHS) Net Debt to Equity (RHS)

FY08* annualised (Change in reporting period from June ending to March)

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Page 48 | 06 August 2018 | JK Paper

Raw material security – fibre & pulping capacity
Company sources 85% of fibre from farm forestry Increasing area under farm forestry
200 Area under farm forestry (in '000s hectares)
 JKPL started plantation efforts in 1990s by encouraging farmers to plant
180
wood by distributing samplings.
160
 Over the years, it has managed to bring 163,752 hectares of land under
140
plantation. This has led to 100% assured fibre requirement in Orissa unit and
120
60% in Gujarat unit. The target is to reach 75% in Gujarat in next few years.
100
This will lead to EBITDA margin improvement of 0.5%.
80
 Sirpur mill has been promised access to wood from government forest for
60
10 years at concession for Rs.1000 ADMT for 1.5 lacs ADMT. Additionally,
40
degraded land will be made available exclusively for unit.
20
 JKPL imports long fibre to add strength in packaging board at Gujarat unit 0
which is not available in India. FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Source: Company, Investec Securities estimates

Increased integrated pulping capacity would lead to lower dependence on imports

Pulping Capacity (in '000 TPA)
250
 To convert the sourced wood into paper, JKPL has pulping capacity of
276,000 TPA. 200
 Addition of 160,000 TPA of Pulping capacity has been announced.
 This addition will lead to fully integrated pulping capacity. 150

100

50

0
JKPM unit CPM unit CPM unit (Post recently announced
expansion)
Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Page 49 | 06 August 2018 | JK Paper

Raw material security & efficiency provides comfort for expansion - water, power & chemicals
Water adequacy & reducing water requirement Reducing chemicals cost as efficiency improves [85% non-crude based]
Chemical cost (as a % of net sales)
18%
 JKPM unit of Orissa meets its water requirement from river Nagavali, a
17%
perennial river flowing next to the unit.
16%
 CPM unit of Gujarat meets its requirement from river Ukai left bank canal
15%
sourced from river Tapi flowing at a distance of less than 5 km from the
14%
unit.
13%
 Water Consumption reduced from 84 m3/ ton of paper in FY12 to 45.4
12%
m3/ton in FY17.
11%

10%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates
Power cost reduced from 14.0% of net sales in FY12 to 8.6% in FY18 Power efficiency achieved over the years
Power Consumption at JKPM unit (kWh/ ton of paper)
1400
 It has captive power of 80 MW. [Requirement of 61 MW]
 Cost reduction was partially owing to falling crude prices [Brent crude oil 1350
prices reduced from $111 per barrel to current 75 levels].
 Assured coal availability from Coal India reduces JKPL’s reliance on open 1300

market purchases and savings.

1250
 Coal consumption reduced from 2.1 MT/ ton of paper in FY13 to 0.6 MT in
FY18. Power consumption per ton of paper also reduced from 1368 units 1200

in FY12 to 1130 units in FY18 on account of investments made in

1150
conservation of energy equipment. Use of Renewable fuel sources [22%
at CPM unit and 56% at JKPM unit of FY18 requirement] is also helping 1100
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
JKPL to reduce costs.
Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates
Note: Details for period prior to FY11 not available

Page 50 | 06 August 2018 | JK Paper

Volume(s) drive growth, operating leverage & margin
Revenue growth comes in spurts as volume ramps up Higher contribution to revenue from volume; realisation grew at inflation
35,000 Net Sales (in Rs. mn) Net Sales (YoY % growth) 35% Revenue growth contributed by growth in Sales volume & Realisation (%)
35%
31%
30,000 30% 30%

25% 25% 10% 24%

25,000 2%
20% 20% 18%
20,000 16% 13%
15% 14% 5%
15% 11%
15,000 10% 8% 6% 21% 9% 21% 8% 8%
7% 8% 8%
10% 15%
-2% 11% 5% 13% 3% 4% 4%
5% 8% 3% 4% 5%
10,000 7% 6%
5% 6% 5% 5% 2%
0% 3% 4% 4% 3% 2%
0% 1% 1% -2%
5,000 -1%
0% FY04 FY05 FY06 FY07 FY08* FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
-5% -9%
0 -5%
FY04 FY05 FY06 FY07 FY08* FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E -10%

Net Sales (LHS) Net Sales Growth (RHS) -15%

Sales Volume growth Realisation growth
FY08* annualised (Change in reporting period from June ending to March)
FY08* annualised (Change in reporting period from June ending to March)
Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Outsourcing an additional lever for growth as imports became cheap Product mix to substantially tilt towards packaging post expansion

Outsourcing volumes (in tonnes)

50,000  Product mix in FY18 was Uncoated paper - 62%, Coated Paper - 19% and
45,000 Packaging board - 18%.
40,000
 The company has announced expansion plans for Packaging board.
35,000

30,000
 Virgin Packaging board segment has higher ROCE and is the fastest
25,000 growing segment for JKPL.
20,000  Thus, expansion will further improve company’s ROCE.
15,000

10,000

5,000

-
FY15 FY16 FY17 FY18

Source: Company, Investec Securities estimates

Page 51 | 06 August 2018 | JK Paper

Realization & leverage (operating & financial) to drive earnings growth
Expect further modest improvement from realization & operating leverage Contribution to EBITDA margin
EBITDA (in Rs mn) EBITDA margin (%) (As a % of Net Sales)
9,000 30% 100%
11% 9% 7% 12%
8,000 90% 16% 19% 22%
6% 8% 25% 26%
25% 7% 9%
7,000 80% 10% 9% 7%
9% 8% 8% 8%
70% 7% 7% 7%
13% 11% 8%
6,000 20% 14% 10% 9% 8%
8% 8%
60% 8% 9%
5,000 8% 8%
15% 50%
4,000 40%
3,000 10% 30% 62% 64% 62% 60%
58% 57% 54% 51% 51%
2,000 20%
5% 10%
1,000
0%
- 0% FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
FY04 FY05 FY06 FY07 FY08* FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E Raw Material consumed Power Employee Cost Others EBITDA
EBITDA (LHS) EBITDA Margin (RHS) (The numbers prior to FY12 are not comparable)

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Reducing interest expense… .. will aid PAT growth as company pay down expensive debt
2,400 Interest Expense (in Rs mn) Interest Expense (as a % of net sales) 10% PAT (in Rs mn.) PAT margin (%)
5,000 14%
9%
12%
2,000 4,000
8%
10%
7% 3,000
1,600 8%
6%
6%
2,000
1,200 5%
4%
4% 1,000
2%
800
3%
0 0%
2% FY04 FY05 FY06 FY07 FY08* FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
400 -2%
1% -1,000
-4%
0 0%
-2,000 -6%
FY04 FY05 FY06 FY07 FY08* FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E PAT (LHS) PAT Margin (RHS)
Interest Expense (LHS) Interest as a % of Net Sales (RHS)

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates
FY08* annualised (Change in reporting period from June ending to March)

Page 52 | 06 August 2018 | JK Paper

Focus on improving balance sheet
Why are working capital days reducing? Reducing working capital days
Working capital (days)
160
 Focus on collections – reducing receivables, and
140
 Decrease in inventory days because of steps taken to reduce distance
120
to source wood within 200 km radius of mills. JKPL increased the
100
hardwood proportion procured within 200 km radius from 41% in 2015- 80
16 to 71% in 2017-18. 60

40

20

0
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
-20

-40
Net Working Capital days Receivables days Inventory days Payables days Others

Source: Company, Investec Securities estimates

Net debt is reducing gradually

Net Debt (in Rs mn) Net Debt to Equity Ratio (x)

22,000 3.0

20,000
2.5
18,000

16,000
2.0
14,000

12,000 1.5

10,000
1.0
8,000

6,000
0.5
4,000

2,000 0.0
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E

Net Debt (LHS) Net Debt to Equity (RHS)

Source: Company, Investec Securities estimates

Page 53 | 06 August 2018 | JK Paper

Investment Negatives
Key Negatives Details

JKPL increased capacity in FY13 at a cost of Rs17.8 bn, funded by a mix of rights issue and debt. This led to a sharp reduction in
PAT, owing to high interest, unfortunately timed with severe increase in raw material price. JKPL seems to have miscalculated by not
Chequered history of ensuring raw material before expansion, and as profitability suffered the high level of debt ensured that JKPL posted substantial losses
overleverage & raw material in FY14.
shortages
We believe that JKPL has learnt from past experience, and its current cycle of expansion has been carefully planned – maintaining
balance sheet discipline, and ensuring raw material security through substantial effort on the year on farm forestry.

Past expansion has focused more on inefficient\costly equity dilution, through share and FCCB issuance. In our opinion, FCCBs are
one of the most costly instruments for capital raise, and for the vast majority of structures benefit investors more than the issuer. As a
result of these past moves, current holders have been diluted, and shares outstanding have increased from 78.1mn in FY09 to 175.5mn
in FY18.
Equity Dilution

JKPL’s next phase of expansion is depending substantially on internal cash flow generation, and debt (to a much lower extent). We
are encouraged by management’s more responsible stance towards equity raising, as a cycle of minimal leveraging, and deleveraging
prior to the next expansion will ensure maximum upside for equity investors through cycles.

Page 54 | 06 August 2018 | JK Paper

As recently as FY14, poorly planned expansion resulted in losses
EBITDA and PAT Margin declined in FY14 What went wrong?
30% (% of net sales)  JKPL increased capacity in FY13 at Rs 17.8 bn, funded by a mix of
25% rights issue and debt. This led to a sharp increase in debt.

20%
 Further, simultaneous capacity additions by multiple players in the
industry from FY11 without improving fibre availability led to an increase
15%
in raw material prices.
10%
 Higher raw material prices could not be fully passed on due to excess
5%
supply from new domestic capacities and imports.
0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E  EBITDA margin of JK Paper reduced from 21% in FY11 to 7% in FY14.
-5%
[fall of 14%]
-10%
EBITDA margin PAT Margin
 PBT margin reduced from 12% in FY11 to -7% in FY14 [fall of 19%] due
to higher interest and depreciation burden.
Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Higher raw material prices impacted EBITDA margin… …at a time when balance sheet gearing was high
85% Raw material and manufacturing cost (as a % of sales)*
2,100 Interest & Depreciation (in Rs mn)

80% 1,900
1,700
75% 1,500
1,300
70% 1,100
900
65%
700
500
60%
300
100
55%
FY04 FY05 FY06 FY07 FY08* FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Interest Depreciation
*excludes Employee, General & Admin, Selling & Distribution and Miscellaneous expense FY08* annualised (Change in reporting period from June ending to March)
Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Page 55 | 06 August 2018 | JK Paper

JKPL’s past expansion had been funded by expensive equity
Past equity dilution was expensive for minorities Issue price vs market price
200 (Shares outstanding in mn) FCCB Conversion @ Rs 56.37
180 Issue Date Issue Market
Preferential Allotment @ Rs 42
Price Price
160 Rights issued @ Rs 42
Preferential Allotment Rights Issue 26-Jul-11 42 45
140 @ Rs 65 & GDRs @
Rs 69
120
Preference
Preferential Allotment 09-Sep-11 42 44
100 Shares converted
@ Rs 40
80 FCCB Conversion 19-May-17 56 108
60
FCCB Conversion 09-Jun-17 56 105
40

20
FCCB Conversion 03-Jan-18 56 144
0
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E

Source: Company, Investec Securities estimates

 The Company’s past expansion was not only poorly planned (without ensuring raw material security), but also resulted in substantial dilution for Equity investors as
internal cash flow generation was insufficient to fund the Rs17,750 mn of committed Capital Expenditure.

 Share count more than doubled between FY11 to FY18. We even question the use of FCCB’s, as generally these are more beneficial for new Investors than
existing shareholders. Warrants were sold at a cheap price to lower interest rate, which resulted in heavy dilution in the future.

 A more measured pace of expansion funded primarily through internal accrual, and sustainable new debt is preferable. Now, having learned through past
experience, we are encouraged that the Company’s current expansion plan is geared similarly.

Page 56 | 06 August 2018 | JK Paper

Valuation
 The paper sector in India has come through challenging times, with a reasonable proportion of the sector entering bankruptcy. Factors contributing to the stress include 1)
overleverage 2) lack of raw material security and 3) competition from imports as tariffs were lowered over the years as part of free trade treaty with ASEAN countries.
However, the remaining companies have regained health, market share and are operating at high profitability.
 JKPL is one such company that has taken leadership of the sector. The company has reduced gearing, Net Debt is only ~Rs.10,234 mn, even as JKPL generated free
cash flow of Rs. 5,040.4 mn in FY17, and Rs. 4,699.7 mn in FY18. This implies FCF yield of 12.6%, given the Company’s EV of Rs. 37,211.6 mn.

 In addition, JKPL has been expanding RoIC (as capacity is used up) ~11.5% in FY18, expanding to 15% in FY19E, having become working capital neutral over the years,
given its efforts of procuring pulp from short distances, and control on receivables. Finally, Incremental RoIC will remain high as JKPL embarks on 1) cheap acquisitions &
turnaround and 2) brownfield acquisition, with relatively lower capital requirement.

 Since JKPL’s prospects have improved, and it is a choice consolidator in an industry where fewer large, healthy players remain. JKPL’s finances have never been this
strong as Net Debt\EBITDA is now at 1.7X (FY18). We believe that the stock will trade at a premium to its past distressed multiples, and we benchmark it to global peers,
and assign it FY20 P/E of 9x to arrive at a target price of Rs220.

Price Net EPS P/E FCF

Market Cap EV EV/
Indian Companies (In INR) YTD Debt/
04/08/2018 (Rs. mn) (Rs. mn) EBITDA 2018 2019E 2020E 2018 2019E 2020E Yield
EBITDA
JK Paper 151.3 9.0% 26,959.3 37,193.7 6.1 1.7 15.3 20.8 22.2 9.9 7.3 6.8 12.6%
West Coast Paper Mills 320.6 1.8% 21,172.0 23,634.7 6.5 0.7 33.8 36.6 41.8 9.5 8.8 7.7 7.9%
Tamil Nadu Newsprint & Papers 296.8 -33.9% 20,538.2 46,219.9 11.4 6.4 -6.1 30.2 48.4 0.0 9.8 6.1 11.6%
IP APPM 393.6 24.2% 15,651.5 17,146.4 7.7 0.7 23.1 25.5 28.3 17.0 15.4 13.9 10.7%
Average 7.9 2.3 9.1 10.3 8.6

Price Net EPS P/E FCF

Market Cap EV EV/
Global Players (In USD) YTD Debt/
04/08/2018 (USD mn) (USD mn) EBITDA 2018 2019E 2020E 2018 2019E 2020E Yield
EBITDA
International Paper 52.6 -12.1% 21,486.5 31,235.5 8.3 2.6 3.5 5.1 5.7 15.2 10.4 9.2 1.3%
Nine Dragons 1.3 -22.7% 5,919.4 8,781.7 7.7 2.5 0.1 0.2 0.2 10.4 6.5 6.7 0.1%
Mondi PLC 2,906.9 15.7% 14,079.9 15,588.4 9.5 0.9 168.9 194.3 204.8 17.2 15.0 14.2 3.2%
Average 8.5 2.0 14.3 10.6 10.0
Source: Company, Bloomberg, Investec Securities estimates

Page 57 | 06 August 2018 | JK Paper

Valuation
Historical P/E ratio [12 month forward] Relative P/E ratio [12 month forward]
20.0 P/E (x) Close Price (in Rs.) 180 1.0 Relative P/E (x)

18.0 160 0.9

16.0 140 0.8
14.0
120 0.7
12.0
100 0.6 0.5
10.0 8.8 6.7 0.5
80
8.0
0.4 0.2 0.3
60
6.0
4.5
40 0.3
4.0
20 0.2
2.0

0.0 - 0.1
Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18
0.0
P/E Average P/E Close Price Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18

Source: Company, BSE, Investec Securities estimates Source: Bloomberg, Investec Securities estimates

Historical EV/EBITDA [TTM] Historical P/B ratio

22.0 EV/EBITDA(x) 2.0 P/B (x)

20.0 1.8
18.0 1.6
16.0
1.4
14.0 1.0
1.2 0.9
12.0
1.0 0.7
10.0
6.3 0.8
8.0 5.7
4.4 0.6
6.0

4.0 0.4

2.0 0.2
Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18

Average EV/EBITDA EV/EBITDA P/B Average P/B

Source: Company, BSE, Investec Securities estimates Source: Company, BSE, Investec Securities estimates

Page 58 | 06 August 2018 | JK Paper

Valuation
Historical Price/Sales Net Debt\EBITDA

1.0 P/S (x) 18.0 Net Debt/EBITDA (x)

0.9 16.0
0.8
14.0
0.7
12.0
0.6
0.41 10.0
0.5 0.47
8.0
0.4
0.28 6.0
0.3
4.0
0.2
0.1 2.0

0.0 0.0
Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Average P/S P/S

Source: Company, BSE, Investec Securities estimates Source: Company, Investec Securities estimates

Net Debt\Equity
3.0 Net Debt/Equity (x)

2.5

2.0

1.5

1.0

0.5

0.0
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19EFY20E
Source: Company, Investec Securities estimates

Page 59 | 06 August 2018 | JK Paper

Valuation
Du Pont

Du Pont FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E

EBIT Margin (%) 18.9% 13.7% 13.3% 14.2% 11.6% 10.4% 15.9% 16.2% 7.8% 4.9% 0.9% 7.1% 11.7% 16.0% 18.2% 21.1% 20.5%

Asset Turnover (x) 0.7X 0.7X 0.7X 0.7X 0.8X 1.0X 1.1X 1.1X 0.7X 0.6X 0.7X 0.9X 0.9X 0.9X 1.0X 1.1X 0.9X

Interest Burden (x) 0.6X 0.5X 0.6X 0.7X 0.5X 0.5X 0.7X 0.7X 0.5X 0.3X -6.4X -0.3X 0.3X 0.6X 0.7X 0.8X 0.9X

Tax Burden (x) 0.6X 1.0X 0.7X 0.6X 1.0X 0.7X 0.7X 0.7X 0.9X 1.0X 0.6X 0.2X 0.7X 0.7X 0.7X 0.7X 0.7X
Equity Multiplier
2.3X 3.3X 2.4X 2.8X 2.6X 2.6X 2.2X 1.9X 2.2X 2.9X 3.3X 3.2X 2.4X 2.1X 1.7X 1.4X 1.5X
(x)
ROAE 11.6% 15.1% 8.6% 12.1% 11.8% 9.3% 19.1% 18.1% 5.8% 2.5% -7.5% -1.6% 5.5% 12.3% 15.8% 18.7% 17.1%

Source: Company, Investec Securities estimates

Page 60 | 06 August 2018 | JK Paper

Company Overview
Established in 1938, The Company started manufacturing paper using its straw board machine. Today JK paper is third largest Paper Manufacturer in India. It is part of the
reputed JK Organization.

Operations
 JK paper has two integrated paper manufacturing units – JK Paper mills, Orissa and Central Pulp Mills, Gujarat with combined capacity of 455,000 tonnes per annum
(TPA). Products include writing and printing paper (Coated 54,000 TPA and Uncoated 292,000 TPA), packaging boards (90,000) and saleable pulp of 19,000 TPA.

 Both the units have integrated pulping capacity [combined capacity 276,000 TPA]. The company has captive power capacity of 80 MW. Water is abundant for both the
units. The strong balance sheet together with strong promoter support ensures JKPL would likely face no shortage of capital.

 It has a strong distribution network of 208 wholesalers covering over 4000 dealers and 2200 sub dealers with 16 warehouses and 4 regional offices. Although paper
is a commodity, the products of JKPL have a “brand value” which helps them charge a premium. This brand effect helps JKPL outsource products and overcome its
capacity constraints. This helps JKPL maintain its market share as well. JK Paper is the market leader in the copier paper segment and among the top two players in
coated and high end packaging boards business.

Future Plans
 It is embarking on expanding its packaging unit [high demand, lower EBITDA margin but high ROCE than writing and printing paper] by 200,000 TPA and pulping
capacity by 160,000 TPA. Simultaneously, JKPL is in process of acquiring Sirpur Mills [Capacity of 138,300 TPA] which is under the NCLT.

 This will make JKPL move up to 2nd largest paper manufacturer with combined capacity of 793,300 TPA.

Competition
 Uncoated paper segment is crowded with multiple players both domestic and imports. However, Coated paper and High end virgin packaging paper has few domestic
players. Coated paper is manufactured by mere 2 players in India – JK paper & Ballarpur Industries but imports have disturbed the domestic dynamics.
 With Anti-dumping investigations initiated for both coated and uncoated paper, we believe JK paper is well placed in the market.

Page 61 | 06 August 2018 | JK Paper

Timeline
1938 : JKPM Unit started manufacturing 1997 : Capacity increased to 90,000 TPA in JKPM. 2012 : Entered Joint Venture with Oji
straw board at Bhopal with a capacity of 1998 : Pulp mill of 127,000 TPA installed in JKPM. Holdings corporation and others to
3,600 TPA. 2001 : Enhanced capacity to 150,000 TPA. manufacture and sell Corrugated
1960 : CPM Unit was incorporated under packaging products [20% stake].
2001 : JKPM unit was transferred from JK Laksmi
Companies Act, 1956 as ‘The Central Cement Ltd to CPML. CPML was subsequently 2013 : JKPM Unit - Installed new fibre
Pulp Mills Ltd’ promoted by the Parkhe renamed as JK Paper Ltd. line of 215,000 TPA & high speed paper
group. machine 1,65,000 MT and 55 MW power
2001 : Commissioned a pulp drying plant imported
1962 : JKPM Unit was commissioned with plant.
from Finland
an integrated pulp and paper plant of
18,000 TPA in Orissa.

1938 1962 1997 2002 2012 2016

1971 : Set up R&D facility Pulp & Paper Research 2002 : Started outsourcing products that it did not 2016 : Cessation of JV with Oji
Institute (PAPRI). manufacture. holdings.
1975 : CPM Unit started paper production with 2002 : Issued commercial Paper of Rs 10 Crores. 2018 : Announced 200,000 TPA
40,000 TPA. 2005 : Installed coating plant of 30,000 TPA at JKPM. packaging board & 160,000 TPA pulp
1988 : CPM was referred to BIFR due to 2007 : Installed multilayer packaging board of 60,000 expansion at CPM unit.
accumulated losses. TPA at CPM unit.
1991 : Plantation initiative was started at JKPM 2011 : Upgradation resulted into increase in the
Unit and then later extended to CPM Unit. capacity of packaging board from 60000 to 84000
1992 : JK Corp acquired Central Pulp Mills Limited TPA. Total capacity was 290,000 TPA of paper and
(CPML) in Gujarat through BIFR. saleable pulp.

Source: Company, Investec Securities estimates

Page 62 | 06 August 2018 | JK Paper

Insider ownership
# of shares as on Mkt value % of total shares
Beneficial owner
30th June 2018 (in '000s) (In Rs. Mn) outstanding

Bengal & Assam Company Ltd 36,418.3 5,511.9 20.4%

BMF Investments Ltd 30,090 4,554.1 16.9%

Florence Investech Ltd 11,833 1,791.0 6.6%

J.K. Credit & Finance Ltd 3,575 541.1 2.0%

Singhania Family 1,406 212.9 0.8%

Nav Bharat Vanijya Ltd 1,191 180.3 0.7%

Juggilal Kamlapat Udyog Ltd 1,190 180.1 0.7%

Accurate Finman Services Ltd 411 62.2 0.2%

Hari Shankar Singhania Holdings Pvt Ltd 175 26.5 0.1%

Total 86,290 13,060.0 48.4%

Source: Company, Investec Securities estimates

Page 63 | 06 August 2018 | JK Paper

Institutional ownership
# of shares as on Mkt value
Beneficial owner % of total shares outstanding
30th June 2018 (in '000s) (In Rs. Mn)

JK Paper Employees' Welfare Trust 9,829 1,487.6 5.5%

International Finance Corp. 7,690 1,163.9 4.3%

Edgefield Securities Ltd. 2,500 378.4 1.4%

Dimensional Fund Advisors LP 1,135 171.8 0.6%

BOI AXA Investment Managers Pvt Ltd. 891 134.9 0.5%

Acadian Asset Management LLC 622 94.1 0.3%

APG Asset Management NV 593 89.8 0.3%

Reliance Nippon Life Asset Management Ltd. 420 63.6 0.2%

Van Eck Associates Corp. 357 54.0 0.2%

BNY Mellon Asset Management North America Corp. 156 23.6 0.1%

Others 426 64.5 0.2%

Total 24,619 3,726.1 13.8%

Source: Company, Investec Securities estimates

Page 64 | 06 August 2018 | JK Paper

Management team
Joining
Manager Affiliation Brief profile
Yr
 A seasoned industrialist, he manages a group with combined revenue of $4 billion, comprising
10 companies. Over the years, he has built JKPL into a market leader in paper manufacturing.
He directly controls the strategy and finance functions of JKPL.
Harsh Pati Singhania 1992 Managing Director
 He has been Vice Chairman of the Board since 2013 and Executive Director since 1992.
 Qualifications – MBA from University of Massachusetts, B.com, OPM Programme from Harvard
Business School, USA
 Mr. Goyal has solid credentials for turning around various underperforming units into profitable
ventures during his career – a unique skill, particularly useful in an industry where sectoral
consolidation opportunities exist. His experience also includes the commissioning of large
Om Prakash Goyal 1996 Whole Time Director green field projects.
 He is also an active Member of Indian Paper Manufacturers Association (IPMA). At JKPL, he is
a member of Audit Committee, Stakeholders’ relationship committee and CSR Committee
 Qualifications – FCA, B. Com.
 He has previously worked with Voltas, ITC Group and Ciba-Geigy. Prior to joining Voltas in
September 2005 as Vice President of Finance, he was with Atul Limited as General Manager
Kumarasswami Virupakshan 2005 CFO
of Finance.
 Qualifications – CWA, B. Com, MBA from IIM (A)
 Mr. Mehta has contributed to major initiatives taken by JK Group, mainly on mergers and
A S Mehta 2011 President acquisitions, quality certification, corporate governance, cost compression, etc. Mr. Mehta had
been entrusted with major capacity expansion plans at JKPL.
 He has over 22 years of experience in the paper industry and has previously worked with ITC
Chief General Manager PSPD, Ballarpur Industries Ltd.
Santosh Wakhloo 2009
- Sales  Qualifications – BE, MBA, programs from Wharton school, Northwestern university, Fundacao
Dom Cabral.
 Mr. De previously worked with Orient Paper Mills, Rohit Pulp & Paper Mills, Balkrishna
Industries (a subsidiary of Siyaram Silk Mills), BILT Industries, ITC`s paper board and specialty
Chief Executive - New
Ashish De 2005 paper division in various capacities.
Projects
 Qualifications – BSC , post graduate diploma in pulp and paper technology, trained in recycled
paper board treatment and coating technology from USA.
Source : Company, Investec Securities estimates

Page 65 | 06 August 2018 | JK Paper

Board of directors
Joining
Director Affiliation Brief profile
Yr
 He is an industrialist with over 59 years of experience in covering various multi purpose
industrial segments.
 He has acted in the capacity of Chairman/Director of several companies within the JK Group
Bharat Hari Singhania 2013 Chairman
together with, Florence Alumina Ltd, Bengal & Assam Co Ltd, Florence Investech Ltd, Henry
F. Cockill & Sons Ltd., Rockwood Properties Private Ltd. and Tanvi Commercial Private Ltd.
 Qualifications – B.Com
Harsh Pati Singhania 1992 Vice Chairman See profile in prior section
Om Prakash Goyal 1996 Executive Director See profile in prior section
 She is the Managing Director of JK Lakshmi Cement Limited. She is president of Cement
Manufacturers' Association, and Chairperson of National Council for Cement and Building
Other Non Executive
Vinita Singhania 2009 Materials.
Director
 She serves as a director at HEG Ltd, Bengal & Assam company Ltd and others.
 Qualifications – BA
 He is the Executive Chairman of SRF Ltd since 2008. He served as President of Association
of Synthetic Fibre Industry and of National Body of Confederation of Indian Industry. He
serves as the Chairman of Indo-Korea Joint Business Council, of Northern Region of
Non Exec. & Confederation of Indian Industry (CII).
Arun Bharat Ram 2006
Independent director  At JK Paper, he is Chairman of Nomination and Remuneration Committee, a member of Audit
Committee and Stakeholders’ Relationship Committee.
 Qualifications - B.Sc (Industrial Eng) and Diploma from Technical University of Darmstadt,
Germany
 He is the founder of Tamara Capital Partners, and serves as its Principal. He served as MD
for Lazard UK & USA. He founded Lazard India and served as its Chairman. He was
director/chairman at Deutsche Bank, Thomas Cook India Ltd, Reliance Capital Ltd, Pritish
Nandy Communications Ltd, Prabhat Dairy and others.
Non Exec. &
Udayan Bose 2006  At JK paper, he is chairman of Audit committee, a member of Nomination and Remuneration
Independent director
Committee.
 Qualifications - Graduated with Chemistry (Hons.) and Mathematics as Majors. He is a
Fellow of the Chartered Institute of Bankers, U.K. and has done Advanced Management at
Harvard Business School, USA.

Page 66 | 06 August 2018 | JK Paper

 Joining
Director Affiliation Brief profile
Yr
 He serves in a multitude of Executive roles in Kanoria Chemicals & Industries Ltd, the FICCI,
Kirtivardhan Finvest Services Ltd, KPL International Ltd and KCI Alco Chem Ltd.
Non Exec. &  At JK Paper, he is member of Audit Committee and Nomination & Remuneration Committee,
Rajya Kanoria 2007
Independent director chairman of Stakeholders’ relationship committee.
 Qualifications - B.Sc., MBA (Hons.) from IMD, Switzerland and has done Advanced
Management from Wharton.
 He has acted as President and other Executive roles at: International Chamber of Commerce
Non Exec. & India, HSIL Ltd, PHD Chamber of Commerce & Industry, All India Glass Manufacturers
Sandip Somany 2014
Independent director Association, Indian Council of Sanitaryware Manufacturers Association, etc.
 Qualifications - Undergraduate degree from the University of Delhi
 He is a Director of First Capital India Ltd., Dalmia Bharat Sugar and Industries Limited,
Non Executive &
Hari Machines Ltd, Dalmia Agencies (P) Ltd. and served as the President of Indian
Mridu Hari Dalmia 2009 Independent director
Refractories Manufacturers Association and Cement Manufacturers Association.
 Qualifications - Bachelor's degree in Chemical Engineering
 He has been MD of Camson Bio Technologies Ltd since 2017, and has been Chief Scientific
Officer since Aug 2015.
 He is eminent personality of Tea industry and is associated with many chambers including
Other Non Executive
Dhirendra Kumar 2001 Tea Association of India, Indian Tea Association, Calcutta Tea Traders Association, Bharat
Director
Chamber of Commerce, etc.
 At JK paper, he is a member of Nomination and Remuneration committee.
 Qualifications - B.E. in Mechanical from New York University
 He is a senior partner of law firm firm Swarup & Company and Director at Bengal & Assam
Company Ltd, Eros International Plc, Gujarat Fluorochemicals Ltd., India Thermit Corporation
Ltd., Subros, Vis Legis Consult Private Ltd., Xerox India Enterprises Pvt. Ltd., Samtel Color
Ltd. and many others.
Non Executive &  He served as a Member of the Task Force on Corporate Governance constituted by CII. He
Shailendra Swarup 2013
Independent director served as a member of consultative Group constituted by the RBI.
 At JK Paper, he is a member of CSR committee. He served as a Non-Executive Independent
Director until Jan, 2011.
 Qualifications - He joined the Bar in 1965. He holds a bachelors degree in arts and is also a
law graduate.
Source : Company, Investec Securities estimates

Page 67 | 06 August 2018 | JK Paper

Financial models – Quarterly Income Statement
Quarterly Income Statement Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19
Revenues 5,853.5 5,974.0 6,039.0 6,506.0 6,065.1 6,852.4 6,379.8 6,988.8 6,320.7 6,714.9 7,908.7 7,498.4 7,950.1
% YoY 19.5% 11.9% 9.1% 11.8% 3.6% 14.7% 5.6% 7.4% 4.2% -2.0% 24.0% 7.3% 25.8%
EBITDA 1,001.0 1,012.6 951.9 922.4 1,140.6 1,337.5 1,240.3 1,425.7 1,530.5 1,388.3 1,539.3 1,652.7 1,993.9
% of sales 17.1% 17.0% 15.8% 14.2% 18.8% 19.5% 19.4% 20.4% 24.2% 20.7% 19.5% 22.0% 25.1%
Depreciation 265.3 265.7 298.2 270.1 298.2 302.0 302.2 292.9 296.4 303.8 305.6 303.0 307.9
Operating Profit 735.7 746.9 653.7 652.3 842.4 1,035.5 938.1 1,132.8 1,234.1 1,084.5 1,233.7 1,349.7 1,686.0
% of sales 12.6% 12.5% 10.8% 10.0% 13.9% 15.1% 14.7% 16.2% 19.5% 16.2% 15.6% 18.0% 21.2%

Interest expenses 514.9 514.3 500.1 470.5 487.9 488.9 487.1 432.3 397.0 333.4 369.7 330.1 282.1
Other income 20.6 51.7 34.6 43.9 33.7 74.7 67.4 88.7 64.8 63.7 59.5 69.7 67.8
Exceptions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
PBT 241.4 284.3 188.2 225.7 388.2 621.3 518.4 789.2 901.9 814.8 923.5 1,089.3 1,471.7
% to net sales 4.1% 4.8% 3.1% 3.5% 6.4% 9.1% 8.1% 11.3% 14.3% 12.1% 11.7% 14.5% 18.5%

Tax 73.6 86.2 56.8 127.6 121.6 181.7 159.5 226.0 300.8 248.5 224.8 376.4 520.3
Eff tax rate (%) 30.5% 30.3% 30.2% 56.5% 31.3% 29.2% 30.8% 28.6% 33.4% 30.5% 24.3% 34.6% 35.4%
PAT 167.8 198.1 131.4 98.1 266.6 439.6 358.9 563.2 601.1 566.3 698.7 712.9 951.4
% to net sales 2.9% 3.3% 2.2% 1.5% 4.4% 6.4% 5.6% 8.1% 9.5% 8.4% 8.8% 9.5% 12.0%

EPS [fully diluted] 1.2 1.3 0.9 1.6 1.6 2.6 2.1 3.2 3.4 3.2 3.9 4.2 5.3
% YoY -170.3% -188.9% 1.2% 36.1% 40.5% 102.3% 142.4% 99.4% 108.6% 23.2% 89.8% 29.7% 56.5%
Source: Company, Investec Securities estimates

Page 68 | 06 August 2018 | JK Paper

Financial models – Annual Income Statement
Income Statement FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Revenues 10,771.8 11,055.3 12,327.9 13,300.6 14,591.1 17,378.7 21,588.3 24,372.5 26,286.1 28,442.7 30,760.8 32,003.5
% YoY 33.0% 2.6% 11.5% 7.9% 9.7% 19.1% 24.2% 12.9% 7.9% 8.2% 8.2% 4.0%
EBITDA 1,773.2 2,426.9 2,592.3 1,528.1 1,325.4 1,237.5 2,543.4 3,911.6 5,124.3 6,133.3 7,797.9 8,250.3
% of sales 16% 22% 21% 11% 9% 7% 12% 16.0% 19.5% 21.6% 25.4% 25.8%
Depreciation 696.9 700.4 723.6 729.4 729.1 1,221.0 1,135.9 1,172.2 1,195.3 1,208.8 1,304.0 1,684.8
Operating Profit 1,076.3 1,726.5 1,868.7 798.7 596.3 16.5 1,407.5 2,739.4 3,929.0 4,924.5 6,493.9 6,565.5
% of sales 10% 16% 15% 6% 4% 0% 7% 11.2% 14.9% 17.3% 21.1% 20.5%

Interest expenses 584.7 484.9 513.7 512.5 499.0 1,218.6 2,039.3 1,952.3 1,876.4 1,430.2 1,177.0 860.1
Other income 49.2 27.7 131.9 235.0 118.7 147.6 121.5 105.0 264.5 257.7 0.0 0.0
Exceptions 0.0 0.0 0.0 0.0 157.4 -174.9 0.0 0.0 0.0 0.0 0.0 0.0
PBT 540.8 1,269.3 1,486.9 521.2 373.4 -1,229.4 -510.3 892.1 2,317.1 3,752.0 5,317.0 5,705.4
% to net sales 5% 11% 12% 4% 3% -7% -2% 3.7% 8.8% 13.2% 17.3% 17.8%

Tax 160.7 359.0 421.8 28.0 -3.6 -457.5 -382.9 283.4 688.8 1,150.5 1,621.7 1,740.2
Eff tax rate (%) 30% 28% 28% 5% -1% 37% 75% 31.8% 29.7% 30.7% 30.5% 30.5%
PAT 380.1 910.3 1,065.1 493.2 377.0 -771.9 -127.4 608.7 1,628.3 2,601.5 3,695.3 3,965.3
% to net sales 4% 8% 9% 4% 3% -4% -1% 2.5% 6.2% 9.1% 12.0% 12.4%

EPS [Fully Diluted] 4.7 11.3 13.6 3.5 2.2 -5.7 -0.9 4.0 9.5 14.7 20.8 22.2
% YoY -17.5% 139.0% 20.2% -74.6% -37.0% -359.2% NA NA 135.7% 55.0% 41.7% 7.2%

DPS 1.8 2.0 2.3 1.5 0.5 0.0 0.0 0.5 1.5 2.5 2.5 2.5
% YoY 16.7% 14.3% 12.5% -33.3% -66.7% -100.0% 0.0% 100.0% 200.0% 66.7% 0.0% 0.0%
Source: Company, Investec Securities estimates

Page 69 | 06 August 2018 | JK Paper

Financial models – Balance Sheet
Balance Sheet FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Net worth 4,088.6 4,757.4 5,889.0 8,514.6 8,754.9 7,981.1 7,780.0 11,110.9 13,215.2 16,455.9 19,769.5 23,198.5
Equity capital 785.6 783.5 782.4 1,366.5 1,366.2 1,366.2 1,366.2 1,485.3 1,559.6 1,755.0 1,782.4 1,782.4
Reserves 3,303.0 3,973.9 5,106.6 7,148.1 7,388.7 6,614.9 6,413.8 9,625.6 11,655.6 14,700.9 17,987.1 21,416.0
Debt 6,958.6 5,482.1 5,383.6 10,935.5 17,460.4 21,892.8 20,888.5 18,917.7 16,977.0 13,095.3 9,660.0 12,654.9
Deferred tax liab 1,099.4 1,345.6 1,284.0 1,218.2 1,199.7 738.1 331.9 778.9 979.4 1,393.7 1,393.7 1,393.7
Others 0.0 0.0 0.0 269.2 311.8 380.5 413.1 476.0 555.3 582.5 582.5 582.5
Total 12,146.6 11,585.1 12,556.6 20,937.5 27,726.8 30,992.5 29,413.5 31,283.5 31,726.9 31,527.4 31,405.7 37,829.5
Capitalised assets 9,287.1 8,795.8 8,444.6 8,070.6 7,726.0 24,684.0 22,968.0 27,509.5 26,357.0 26,029.1 26,725.1 33,040.3
Capital WIP 139.6 208.0 938.9 5,818.6 15,392.7 171.5 274.6 195.6 155.1 344.0 344.0 344.0
Investments 27.5 419.4 827.7 729.6 150.5 955.8 280.2 406.2 2,710.0 1,640.7 1,640.7 1,640.7
Cash 342.2 78.7 308.9 1,476.9 338.0 83.4 173.5 146.4 273.9 1,220.2 200.0 200.0
Non Current Assets 2,110.0 1,734.8 1,829.7 2,074.1 2,358.3 4,126.3 4,507.8 2,501.4 1,556.9 1,532.8 1,735.3 1,843.9
Others 240.2 348.4 206.8 2,767.7 1,761.3 971.5 1,209.4 524.4 674.0 760.6 760.6 760.6
Total 12,146.7 11,585.1 12,556.6 20,937.5 27,726.8 30,992.5 29,413.5 31,283.5 31,726.9 31,527.4 31,405.7 37,829.5
Balance Sheet Key Ratios FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Net Debt 6,588.9 4,984.0 4,247.0 8,729.0 16,971.9 20,853.6 20,434.8 18,365.1 13,993.1 10,234.4 7,819.3 10,814.2
Net Debt/Equity 1.6X 1.0X 0.7X 1.0X 1.9X 2.6X 2.6X 1.7X 1.1X 0.6X 0.4X 0.5X
Interest Coverage Ratio 1.8X 3.6X 3.6X 1.6X 1.2X 0.0X 0.7X 1.4X 2.1X 3.4X 5.5X 7.6X
Working Capital Ratios
Inventory Turns 39.7X 41.9X 37.8X 45.1X 54.0X 61.2X 63.2X 50.1X 53.2X 50.6X 50.6X 50.6X
Receivable Turns 36.3X 34.5X 31.9X 39.6X 29.9X 35.9X 24.7X 20.8X 15.4X 14.0X 14.0X 14.0X
Payable Turns 33.9X 38.2X 41.9X 39.2X 34.3X 44.5X 40.2X 28.1X 32.1X 32.7X 32.7X 32.7X
Other Turns 31.3X 21.3X 28.3X 14.8X 12.2X 37.4X 31.7X -2.5X -12.6X -10.4X -11.3X -10.9X
Net Working Capital days 73.3X 59.5X 56.1X 60.2X 61.8X 89.9X 79.3X 40.3X 23.9X 21.5X 20.6X 21.0X
Fixed Asset Turns 319.4X 297.3X 277.8X 381.2X 578.3X 522.0X 393.0X 412.0X 366.0X 371.9X 367.6X 444.5X
Source: Company, Investec Securities estimates

Page 70 | 06 August 2018 | JK Paper

Financial models – Cash Flow
Cash Flow FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Profit Before Tax & Exceptional items 540.8 1,269.3 1,484.5 521.2 373.4 -1,191.1 -595.8 892.1 2,317.1 3,751.9 5,317.0 5,705.4
Adjustments 1,264.7 1,098.9 893.5 1,013.4 1,011.8 2,533.7 3,301.0 2,775.9 2,315.8 1,715.1 859.3 804.8
Changes in Working Capital 221.6 70.0 -61.9 -1,482.8 -148.0 31.1 -107.2 366.9 980.2 87.4 -202.5 -108.6
Cash flow from Operating Activities 2,027.2 2,438.3 2,316.1 51.8 1,237.2 1,373.7 2,598.0 4,034.9 5,613.1 5,554.4 5,973.7 6,401.6
(Purchase)/ Sale of Fixed Assets -318.6 -348.0 -1,241.6 -6,263.5 -8,622.3 -2,673.0 -889.8 -360.0 -572.7 -854.7 -2,000.0 -8,000.0
Purchase / Sale of Investment 0.0 -391.6 -310.1 147.2 605.3 -683.8 689.6 -64.2 -2,133.8 1,223.9 0.0 0.0
Investment Income 66.8 78.3 84.3 160.8 97.4 35.0 55.2 89.1 109.2 95.8 0.0 0.0
Other Investment Activities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Cash flow from Investment Activities -251.8 -661.3 -1,017.8 -5,946.1 -7,916.6 -3,321.2 -145.0 -335.1 -2,597.3 465.0 -2,000.0 -8,000.0
Issue/ (Repayment) of Borrowings -654.3 -1,291.0 -100.6 5,202.6 6,378.8 3,084.7 -260.2 -2,348.5 -1,000.2 -3,343.7 -3,435.3 2,994.8
Proceeds/ (Buyback) from Issue of Equity
0.0 0.0 0.0 2,455.8 0.0 0.0 0.0 500.2 0.0 0.0 154.6 0.0
Capital
Interest Paid -618.3 -532.8 -525.0 -512.7 -545.0 -1,276.0 -2,135.2 -1,878.5 -1,798.4 -1,434.6 -1,177.0 -860.1
Dividend Paid -137.5 -160.1 -386.7 -0.3 -238.4 -79.9 -0.3 -0.2 -89.7 -294.9 -536.3 -536.3
Cash from financing -1,468.7 -2,040.5 -1,068.0 7,062.2 5,540.5 1,728.8 -2,395.7 -3,727.0 -2,888.3 -5,073.2 -4,993.9 1,598.4
Change of cash 306.7 -263.5 230.3 1,167.9 -1,138.9 -218.7 57.8 -27.2 127.5 946.2 -1,020.2 0.0
FCFF 1,708.6 2,090.3 1,074.5 -6,211.7 -7,385.1 -1,299.3 1,708.2 3,674.9 5,040.4 4,699.7 3,973.7 -1,598.4
FCFE 1,054.2 799.3 973.9 -1,009.1 -1,006.3 1,785.4 1,448.0 1,326.4 4,040.2 1,356.0 538.4 1,396.4
Source: Company, Investec Securities estimates

Page 71 | 06 August 2018 | JK Paper

Summary Financials (INRm) Year end: 31 March

Income Statement 2016 2017 2018 2019E 2020E Cash Flow 2016 2017 2018 2019E 2020E Balance Sheet 2016 2017 2018 2019E 2020E
Revenue 24,372.5 26,286.1 28,442.7 30,760.8 32,003.5 Operating profit 2,739.4 3,929.0 4,924.5 6,493.9 6,565.5 Property plant and equipment 27,705.1 26,512.1 26,373.1 27,069.1 33,384.3
EBITDA 3,911.6 5,124.3 6,133.3 7,797.9 8,250.3 Depreciation & amortisation (2,739.4) (3,929.0) (4,924.5) (6,493.9) (6,565.5) Intangible assets 0.0 0.0 0.0 0.0 0.0
Depreciation and amortisation 2,739.4 3,929.0 4,924.5 6,493.9 6,565.5 Other cash and non-cash movements 2,044.7 3,343.1 4,831.3 6,621.0 7,390.2 Investments and other non current assets 930.6 3,384.0 2,401.3 2,401.3 2,401.3
Operating profit 2,739.4 3,929.0 4,924.5 6,493.9 6,565.5 Change in working capital 366.9 980.2 87.4 (202.5) (108.6) Cash and equivalents 146.4 273.9 1,220.2 200.0 200.0
Other income 105.0 264.5 257.7 0.0 0.0 Operating cash flow 2,411.6 4,323.3 4,918.7 6,418.4 7,281.6 Other current assets 1,335.2 831.1 1,050.2 1,050.2 1,050.2
Net interest 1,952.3 1,876.4 1,430.2 1,177.0 860.1 Interest 1,849.4 1,765.8 1,327.1 1,177.0 860.1 Total assets 34,856.2 35,938.6 36,078.6 36,164.7 42,699.8
Share-based-payments 0.0 0.0 0.0 0.0 0.0 Tax paid (225.7) (476.0) (691.3) (1,621.7) (1,740.2) Total debt 18,917.7 16,977.0 13,095.3 9,660.0 12,654.9
PBT (normalised) 892.1 2,317.1 3,752.0 5,317.0 5,705.4 Dividends from associates and JVs (0.4) 0.0 (0.1) 0.0 0.0 Preference shares 0.0 0.0 0.0 0.0 0.0
Impairment of acquired intangibles 0.0 0.0 0.0 0.0 0.0 Cash flow from operations 4,034.9 5,613.1 5,554.4 5,973.7 6,401.6 Other long term liabilities 1,219.0 1,518.7 1,910.7 1,910.7 1,910.7
Non-recurring items/exceptionals 892.1 2,317.1 3,752.0 5,317.0 5,705.4 Maintenance capex (360.0) (572.7) (854.7) (2,000.0) (8,000.0) Provisions & other current liabilities 1,644.2 1,782.0 1,943.8 1,943.8 1,943.8
PBT (reported) 892.1 2,317.1 3,752.0 5,317.0 5,705.4 Free cash flow 3,674.9 5,040.4 4,699.7 3,973.7 (1,598.4) Pension deficit and other adjustments 0.0 0.0 0.0 0.0 0.0
Taxation 283.4 688.8 1,150.5 1,621.7 1,740.2 Expansionary capex 0.0 0.0 0.0 0.0 0.0 Total liabilities 23,745.3 22,723.4 19,622.7 16,395.2 19,501.3
Minorities & preference dividends 0.0 0.0 0.0 0.0 0.0 Exceptionals & discontinued operations 0.0 0.0 0.0 0.0 0.0 Net assets 58,601.5 58,662.0 55,701.3 52,559.8 62,201.2
Discontinued/assets held for sale 0.0 0.0 0.0 0.0 0.0 Other financials (1,854.0) (3,823.0) (115.0) (1,177.0) (860.1) Shareholder's equity 11,110.9 13,215.2 16,455.9 19,769.5 23,198.5
Net Income (normalised) 571.0 1,620.3 25,888.0 3,695.3 3,965.3 Acquisitions 0.0 0.0 0.0 0.0 0.0 Minority interests 0.0 0.0 0.0 0.0 0.0
Attributable profit 608.7 1,628.3 2,601.5 3,695.3 3,965.3 Disposals 0.0 0.0 0.0 0.0 0.0 Total equity 11,110.9 13,215.2 16,455.9 19,769.5 23,198.5
EPS (reported) 4.3 10.8 15.3 20.8 22.2 Net share issues 500.2 0.0 0.0 154.6 0.0 Net working capital 3,246.4 2,510.0 2,530.4 2,658.2 2,804.0
EPS (norm., cont.) – FD (INR) 4.3 10.8 15.3 20.8 22.2 Dividends paid (0.2) (89.7) (294.9) (536.3) (536.3) NAV per share (INR) 74.8 84.7 93.8 110.9 130.2
EPS (norm., cont., IAS19R adj.) – FD - - - - - Change in net cash 2,320.9 1,127.7 4,289.8 2,415.1 (2,994.8)
DPS (INR) 0.5 1.5 2.5 2.5 2.5 Net cash/(debt) 18,365.1 13,993.1 10,234.4 7,819.3 10,814.2
Average number of group shares - FD (m) 148.5 156.0 175.5 178.2 178.2 FCFPS - FD (INR) 24.7 32.3 26.8 22.3 (9.0)
Average number of group shares (m) 148.5 156.0 175.5 178.2 178.2
Total number of shares in issue (m) 148.5 156.0 175.5 178.2 178.2
Source: Company accounts, Investec Securities estimates

Page 72 | 06 August 2018 | JK Paper

Tamil Nadu Newsprint & Papers (TNNP.BO)
Tamil Nadu Newsprint & Papers (TNPL) is the 2nd largest paper manufacturer in India, and also
generates one of the highest, and most consistent EBITDA margins amongst its peers. It is 35.3% BUY
owned by Tamil Nadu government, which is also its largest customer. TNPL’s profitability suffered
Price: INR296 Target Price: INR431
in FY18 as Tamil Nadu underwent a drought, and shortage of water impacted production, and
consequently bagasse from sugar mills became costlier (to normalize by FY21). TNPL is a Market Cap: INR20bn
professionally managed organization, and our channel checks reveal that the management team Forecast Total Return: 46.4%
is reputed to be one of the most competent in the industry. Unabsorbed capacity in the past has
depressed returns, and expect RoIC to improve from here as production\utilization improves. We
expect EBITDA margin to expand through FY20, and TNPL to post EPS of Rs. 48.4. Applying target
multiple of 9X, we arrive at target price of Rs. 431, and assign a BUY rating to the stock.
2016A 2017A 2018A 2019E 2020E
 With 600,000 tons per annum of production capacity, TNPL is the 2nd largest paper manufacturer in
Revenue (INRm) 24,175.4 29,496.8 30,942.3 35,616.5 38,579.9
India. It is also the most cost efficient producer of paper given its access to cheap, and plentiful supply
EBITDA (INRm) 5,668.6 7,288.8 4,044.0 7,028.6 8,659.8
of fibre, and inhouse production of power. Barring the odd hiccup in FY18, owing to a drought situation EBITA (INRm) 4,230.9 5,212.0 1,825.7 4,757.1 6,146.2
in Tamil Nadu, it consistently reports higher EBITDA margin than its peers. PBT (normalised) (INRm) 3,235.7 3,061.3 (279.8) 2,654.6 4,259.5
Net Income (normalised) (INRm) 2,959.5 2,575.3 (390.5) 0.0 0.0
 TNPL is 35.3% owned by the TN Government, which is also its largest customer. 25% of its paper EPS (norm. cont.) – FD (INR) 37.5 38.2 (6.1) 30.2 48.4
sales are to the Tamil Nadu government. In fact, assured demand for TNPL’s product has made it FCFPS - FD (INR) (40.9) 26.5 77.5 74.0 38.8
unnecessary for the company to develop an extensive distribution network. Our analysis reveals that DPS (INR) 0.5 1.5 2.5 2.5 2.5
despite being much larger than both JKPL, and WCPM in terms of capacity, TNPL’s distribution PE (normalised) (x) 7.9 7.7 (48.6) 9.8 6.1
network lags both. EV/sales (x) 0.9 0.7 0.7 0.6 0.5
EV/EBITDA (x) 3.6 2.8 5.1 2.9 2.4
 It is a professionally managed organization, and our channel checks reveal that the management is FCF yield (%) (13.8) 8.9 26.2 25.0 13.1
Dividend yield (%) 0.2 0.5 0.8 0.8 0.8
one of the more competent in the industry. The churn at the top is a mild concern - top management
is appointed by the government. However, deep mid-management strength means that processes,
and longer-term strategic direction are on autopilot, mitigating concern over instability at the top.

 Water shortage, being present in a drought prone state is a problem. TNPL is tackling the water
shortage problem with increasing its reservoir capacity, and we expect TNPL to expand its RoIC as
utilization at its plant improves.
 We believe that the current solid paper cycle is going to sustain, and are initiating on TNPL with a
BUY, and target P/E multiple of 9X on FY20E EPS of Rs. 48.4 (TNPL’s average forward P/E during
Target Price Basis Key Risks
the last cycle, FY04-FY08, which is most representative of the current cycle), to arrive at a 1-year
target price of Rs. 431. Expect TNPL to generate high incremental RoIC on existing capacity as 9x FY20EPS Cyclicality from falling pulp prices & Water
earnings normalize beyond FY20E. In addition, TNPL is capable of generating consistent free cash scarcity in Tamil Nadu
flow to equity of ~Rs300cr, which implies an FCFE yield of ~15% (FY18 FCF yield of 11.6%), providing
solid support for our BUY recommendation.

Page 73 | 06 August 2018 | Tamil Nadu Newsprint & Papers

Investment Positives
Key Positives Details

History of being the lowest TNPL has had the highest, and most consistent EBITDA margin, amongst its peer group in India (FY18 being an aberration). TNPL
cost producer uses bagasse (60% of overall fibre needs) from nearby sugar mills, and is the primary reason for the low cost of its paper production.

Assured supply of fibre, and

Through its efforts over the years, TNPL has enough fibre availability from its primary source – bagasse, or through the option of buying
inhouse power production
wood from its farm forestry effort, or from the government of Tamil Nadu.
reduces volatility in results

Assured government orders TNPL sells 25% of its printing and writing paper to government, and exports 20%. The remaining 55% gets absorbed [mainly in southern
& strong exports markets]. The Tamil Nadu government has agreed to purchase all its paper requirement from TNPL, providing it an assured buyer.

TNPL stopped manufacturing newsprints, as it became uneconomical and moved to manufacturing writing and printing paper. With
Focus on improving product
growing demand in paper board, TNPL is in the process of changing its product mix again. It is now targeting high end packaging
mix
segment [coated board and FBB] for better profitability.

Page 74 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Historically lowest cost producer
Bagasse as a source of fibre is a competitive advantage Manufacturing cost lower than average of top industry players
Raw Material & manufacturing cost (as a % of Net Sales)*
 TNPL is the largest paper producer using bagasse. [60% of its fibre 80%
77%
75%
requirement is sourced from bagasse]. It has long term agreements with 8 75% 73%
71%
70%
68%
sugar mills to procure bagasse in exchange of steam. A portion of power 70% 68% 68% 68% 67% 68%
65% 64% 65%
63% 65%
cost includes bagasse’s procurement cost and thus, making direct 65%
66%
64%
63%
65%
62% 63%
61% 61% 61%
comparison of raw material cost with other Companies problematic. 60% 57% 59% 58%

However, comparing total manufacturing cost of TNPL vs others reveal it 55%

to be the most cost efficient producer of paper in the country. 50%

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
 We believe that some of this cost efficiency is owed to bagasse being a TNPL Average of JKPL, WCPM, IP APPM & Seshasayee

cheaper source of raw material (fibre) than wood. (*excludes Employee, General & Admin, Selling & Distribution and Misc exp)
(Cost breakdown not available for FY18 as all annual reports are not available)

 Bagasse is cheaper source of pulp than wood.

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

TNPL enjoys highest and least volatile EBITDA margin of all Companies
EBITDA Margin (% )
30%
 This cost efficiency has resulted in TNPL consistently registering the highest 26%
26%
25% 25%
EBITDA margin in the industry. Even as their EBITDA margin is higher than 24% 24% 23%
25%
22% 22% 22%
21% 21% 21%
peers, it has been less volatile as the company is assured of fibre supply 20% 20% 20%
20% 18%
from nearby sugar mills. 17% 17%
16% 16%
14% 14% 14%
15% 14%
13% 13%
13%
 FY18 EBITDA margin is an exception as the Company suffered from 11%
10%
shortage of water, and low capacity utilization (83% vs average of 93% over 10%

prior 5 years) resulted in substantial drop in EBITDA margin.

5%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

TNPL Average of JKPL, WCPM, IP APPM & Seshasayee

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Page 75 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Raw material security – wood & bagasse
TNPL ensures fibre security via long term agreements with suppliers Wood availability from TAFCORN [70% of total supply]
180 (70% of total supply of TAFCORN available to TNPL in '000 MT)
 TNPL uses Bagasse (60%), Wood (30%) & Waste paper (10%). Wood available from TAFCORN
160
 There are long term agreements with 8 sugar mills to procure bagasse in
140
exchange of steam. In addition, the company can also source wood from
120
government’s TAFCORN and from farm forestry & captive plantations. 100
 TNPL has entered into a 15-year supply contract in Nov 2004 with Tamil 80

Nadu Forest Plantation Corporation (TAFCORN), where TAFCORN will sell 60

up to 70% of their annual production to TNPL at prices fixed by government 40

on recommendation of Finance Sub-Committee. 20

0
 This agreement expires in 2019. Non-Renewal of this supply agreement FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
poses a risk. However, management is confident on obtaining this renewal.
 Source: TAFCORN’s website, Investec Securities estimates

Increasing land under wood plantation via farm forestry, and captive plantations
Land under plantation (in '000s of Acres) Wood sourced from plantations (in '000 MT)
140 300

Thousands
 TNPL developed two plantation schemes – Farm forestry & Captive
120
250
plantation in 2005.
100
 Gradually, land under plantations has increased from 2,735 acres to 120,715 200

acres. 80
150
 This has created an optional source of supply of fibre for the company, 60

100
keeping volatility in raw material price low, and profitability high. 40

 Currently, wood is mainly sourced from TAFCORN. 50

20

0 0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates
Note- FY18 numbers are not available as annual report is not available

Page 76 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Raw material security – wood & bagasse
Temporary sourcing issues in FY17 & FY18 for bagasse… …. and Wood

 Owing to drought conditions in Tamil Nadu, sugarcane cultivation reduced,  “While there has been some improvement in the availability of wood from
impacting sugar production. This impacted supply of bagasse to TNPL, within the State, unprecedented shortage of wood felt in the neighbouring
making it purchase bagasse from far of mills, and at higher rates. State of Andhra Pradesh in 2013-14, which has been the primary sourcing
 In the recent past, most sugar mills have started using bagasse for captive point for the Andhra based mills and few upcountry Mills had forced these
power generation, impacting availability of bagasse for paper mills. mills to turn to Tamil Nadu for meeting, at least a part, of their shortfall. This
has seriously affected the availability and cost of wood for the Tamil Nadu
based mills” – Seshasayee Paper & Boards FY18 annual report.

Source: Company, Investec Securities estimates Source: Seshasayee Paper & Boards FY18 Annual Report, Investec Securities estimates

Page 77 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Higher pulping capacity & water efficiency
TNPL’s pulping capacity is increasing, but will remain insufficient
1,200.0 Pulping capacity (tons per day)
 TNPL has invested in pulping capacity in line with its increasing production
capacity. Recently TNPL announced an expansion plan of 400 tpd pulping 1,000.0

capacity.
800.0
 However, even though it has sufficient fibre availability in the form of
600.0
bagasse\wood, it has to rely on 100,000 tons of imported pulp to meet its
pulp requirement. 400.0

200.0

0.0
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Bagasse pulp Wood pulp De-inked pulp for waste paper

Source: Company, Investec Securities estimates

Increased water efficiency to combat water shortage

Water consumed (in KL/ ton of paper & Paperboard)
120

 TNPL faces severe shortage of water owing to low rainfall in Tamil Nadu.
100
 To combat this water shortage, TNPL has reduced its consumption of water
significantly from 83 cubic m/ ton of paper in FY04, to 40 cubic m/ton of paper 80

in FY17.
60
 TNPL is also increasing the capacity of its water reservoirs to cater for its
40
higher water requirement (on account of higher paper production capacity).

20

0
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
water consumed for paper water consumed for paperboard

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Page 78 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Power self-sufficiency ensures lower cost, and uninterrupted supply
Power sufficiency achieved in 2002; low dependence on state ensures low cost, and uninterrupted supply
2.0% Power bought from state grid (% of power consumed)
 TNPL achieved self-sufficiency in power in 2002 and thus, its dependence
on supply from the state grid has remained below 2%.
 Power capacity increased to 138.6 MW, from 61.1 MW in FY04 in FY17. Its 1.5%

wind farm capacity also increased to 35.5 MW from 21.8 MW in FY04 in

FY17. 1.0%

 Power consumed per ton of paper has reduced to 1416 kWh from 1657 kWh
in FY04 in FY17, thereby improving efficiency.
0.5%

0.0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

However, excess investment in power capacity is unnecessary Most of wind power generated is sold to government
Wind farm capacity (MW) Wind power units sold as a %
 The company has made excess investments into power generating assets 40 of units generated 110%

– 10% of total assets value. However, revenue contribution from power is 35

100%
a mere 1% of total net sales [FY17]. 30

 The company was self-sufficient in power in 2002 itself. However, it 25 90%

20
continued to add power capacity, and exporting power to the state grid.
15 80%
 A very small portion of wind power is used in paper production, and rest is
10
sold externally [96% in FY17]. 70%
5
 ROICs of TNPL would be somewhat higher, if it focused on paper
0 60%
production, and not built excess capacity in power/cement. FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Wind Capacity Wind power units sold as a % of units generated

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates
Note- FY18 numbers are not available as Annual report is not available

Page 79 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Assured government orders & solid exports

Government orders provide an assured revenue stream Increasing exports [dealer points at 25 countries]
30% Exports volume (as a % of Production)
 35.32% of TNPL’s shares are owned by Tamil Nadu government. 24%
25% 23% 23%
 The TN government has agreed to procure 100% of its paper needs from 21% 21% 21%
19% 20%
20% 18%
TNPL. Most of these orders are for paper used in notebooks. 17% 17% 17% 17%

 Thus, with the growing spend of government on education, TNPL is 15% 13%

assured of a ready and profitable market for its paper. Approximately, 25% 10%
7%
of TNPL’s Writing and Printing paper sales are through government orders. 5%

The company also exported 21% of its paper, and 7% of its paperboard in 0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
FY17.
Paper Paper board
(Sales volume figures before FY13; thus, production is taken as a base)

Source: Company, Investec Securities Source: Company, Investec Securities

Focus on value added products led to improvement in realisations

64 Realisation (Rs/Kg)

Thousands
 TNPL has been slowly upgrading its product mix over the years, which has 63
resulted in improved profitability. They stopped manufacturing newsprints in 62

2010, and converted the machine to higher EBITDA margin Writing & 61
60
Printing Paper.
59
 In 2017, TNPL started to produce paper board. The focus is now on
58
increasing the contribution from high grade paper board, which should aid in 57

expanding EBITDA margin. 56

55
54
FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Note - Sales Volume details prior to FY14 not available

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Page 80 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Investment Negatives
Key Negatives Details

Water shortage in Tamil The mill faces acute shortage of water during poor rainfall. This lack of water disrupts paper production, its farm forestry, eucalyptus
Nadu has potential to production of TAFCORN, and bagasse availability. Bagasse shortage has led to a temporary increase in raw material prices, as TNPL
impact profits has to source bagasse from sugar factories further away from the mill.

We believe that the paper industry will consolidate. However, the down cycle of FY14 forced many mills to discontinue operations, and
TNPL may miss out on
these mills make ideal targets for acquisition by large mills like TNPL. However, TNPL being a government company, there are
inorganic expansion
challenges in it bidding aggressively to acquire assets. In addition, unlike JKPL, it does not yet have experience in acquiring and turning
opportunities
around stressed assets.

Frequent changes in The Management and directors of the company are nominated by the government and change frequently. This potentially impacts the
leadership ability of TNPL to have continuity in strategy, and direction.

The company has not developed a strong dealer network in non-southern states, as 75% of its sales are from Government orders,
Distribution network
exports and Southern India. This could potentially limit TNPL’s ability to expand production.

Page 81 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

EBITDA margin was hit adversely due to water shortage in FY18
EBITDA margin fell in FY18… ...as Cost of Material rose sharply
30% EBITDA margin (%) 85% Raw Material & manufacturing cost* (as a % of Sales)

80%
25%
75%

20% 70%

65%
15%
60%

55%
10%
50%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
5% JKPL WCPM TNPL
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
(*excludes Employee, General & Admin, Selling & Distribution and Misc exp)
JKPL WCPM TNPL (Cost breakdown not available for FY18 as all annual reports are not available)
Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Higher pulp cost and production disruption impacted profitability Will these costs normalise?

 The company sources bagasse [60% of its fibre requirement] from its long-
 We expect bagasse availability to improve, and costs to gradually normalize
term agreements with sugar mills.
lower over the coming years. Management has acknowledged improvement
 Owing to drought conditions, sugar production came down in FY18, also
in bagasse availability. However, EBITDA margin will take time to fully
impacting availability of bagasse. This led to open market buying of bagasse
normalize as TNPL continues sourcing bagasse from longer distances,
from areas away from the mill at higher prices, increasing cost of production
increasing its cost of procurement.
for TNPL.
 Rainfall shortage led to production disruption for both pulping and paper
production in FY17 and FY18, which also impacted the EBITDA margin.

Source: Company, Investec Securities estimates Source: ISMA, Company, Investec Securities estimates

Page 82 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Water shortages & inability to expand inorganically
Acute water problems has led to… …the company losing at least 264 machine days in last 20 years

 Integrated wood based mills are highly water intensive. Due to low rainfall in
Year Machine Days lost due to water scarcity
paper mill area, TNPL has to depend on River Cauvery for water. During
FY98 Not available
summer months, most water bodies remain dry till monsoons.
FY99 Not available
 The area faces acute water shortage, and agitation by villagers in the past FY00 Not available
(FY18, for instance) during times of stress, has forced diversion of water FY03 26
from the mill to villages, resulting in reduced production at TNPL. FY04 37
 From consuming 83 m3 of water per tonne of paper produced in FY04, TNPL FY05 58
has reduced its consumption to 40 m3 in FY17 through water recycling. It FY17 25
FY18 118
also has 19 lac tons of water reservoir, which it plans to increase to 21 lac
Total 264
tons. Still, water availability is a recurring concern for TNPL.
Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Inability to expand inorganically Multiple Stressed assets are available and thus, it is an opportunity loss

 We believe that consolidation in the paper sector is inevitable.  As discussed in the Industry section, the paper industry has numerous
 Companies with a strong balance sheet, and management teams acquisition opportunities, with 2 out of 3 mills having shut operations as per
experienced in turning around trouble companies will be able to buy cheap IPMA.
stressed assets.  In the listed space itself, 26 out of 50 paper companies on BSE have gone
 In the past, TNPL has not bid for any stressed paper mills. As per our into BIFR.
interactions with company expert and management of TNPL, it does not  This provides incumbents, with substantial opportunity to grow
intend to grow via acquisitions. inorganically.
 Multiple mill locations can provide access to multiple markets and reduce
operational risk for a company.

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Page 83 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

TNPL’s leadership changes frequently
In the past 8 years, there have been 11 appointees to MD Board rotation is also frequent

Name Joining Month Cessation Month

Board of Director as on 31 Mar Do they hold directorship
S Sivashanmugaraja Nov-17 - 2015 today?
Dr. R Selvaraj Apr-17 Nov-17 C V Sankar No
Vikram Kapur Sep-16 Apr-17 T Udhayachandran No
Rajeev Rajan Aug-16 Sep-16 Mahesan Kasirajan No
C V Sankar Oct-13 Aug-16 A Velliangiri No
N S Palaniappan Dec-12 Oct-13 R Mani No
Md. Nasimuddin May-12 Dec-12 N Kumaravelu No
Santosh K Misra Jan-12 May-12 M R Kumar No
G Prakash Jan-12 Jan-12 Sarada Jagan No
T K Ramachandran May-10 Jan-12 V Narayanan Yes
Md Nasimuddin Feb-08 May-10 V Nagappan Yes
Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Why does the MD and board change so frequently? Shareholding pattern as on 30th June, 2018

 TNPL is promoted by the Government. The managing directors and board are
appointed by government and they are mainly IAS officers.
 Their availability is dependent on overall government priorities, and Promoters,
Public, 23% 35%
requirement for other government projects.

Institution,
42%

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Page 84 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Distribution network is skewed towards the South and West
Mere 61 distributors reflects poor distribution points in North India

 JKPL has 193 distributors in 24 states, and WCPM has 77 distributors

with presence in 15 states.
 In comparison, TNPL has only 61 distributors with presence in 15 states

1 [41% in southern states].

Punjab  Even as TNPL has opened its products to exports, lack of comprehensive
domestic network is a limitation in selling increased production in the
5
Delhi future.
Rajasthan Uttar Pradesh
2 3 Bihar
1
3
Gujarat Madhya 3 1
West
Jharkhand
3 Pradesh Bengal

13 1
Odisha
Maharashtra

Telangana The numbers in Red reflect number of dealers presence in respective State.

Andhra represents Zonal Offices in respective States

Karnataka Pradesh
6 3 represents mill location

Tamilnadu
4
12
Kerala

Page 85 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Valuation
 The paper sector in India has come through challenging times, with a reasonable proportion of the sector entering bankruptcy. Factors contributing to the stress include 1)
overleverage 2) lack of raw material security and 3) competition from imports as tariffs were lowered over the years as part of free trade treaty with ASEAN countries.
However, the remaining companies have regained health, market share and are operating at high profitability.

 TNPL has been one of the most consistently profitable companies in the sector, and as a result has always garnered premium multiples. However, drought conditions in
Tamil Nadu in FY18 exposed some of its weaknesses – single site dependence, and insufficient water capacity. While TNPL is augmenting its reservoir capacity, and
expects to minimize disruption in future, expect profitability to take a few years to normalize.

 We are assigning a FY20E P/E multiple of 9X to TNPL, inline with JKPL’s multiple. While TNPL in the past has typically traded at a modest premium to JKPL, given more
consistent profitability, we are assigning a similar multiple to both given JKPL’s improved competitive positioning, Like JKPL, TNNP is also highly cash generative, and
currently trades at an FCF yield of 11.6%. We also believe that current Free Cash Flow generation by the industry is sustainable, given ongoing consolidation.

Price Net EPS P/E FCF

Market Cap EV EV/
Indian Companies (In INR) YTD Debt/
04/08/2018 (Rs. mn) (Rs. mn) EBITDA 2018 2019E 2020E 2018 2019E 2020E Yield
EBITDA
JK Paper 151.3 9.0% 26,959.3 37,193.7 6.1 1.7 15.3 20.8 22.2 9.9 7.3 6.8 12.6%
West Coast Paper Mills 320.6 1.8% 21,172.0 23,634.7 6.5 0.7 33.8 36.6 41.8 9.5 8.8 7.7 7.9%
Tamil Nadu Newsprint & Papers 296.8 -33.9% 20,538.2 46,219.9 11.4 6.4 -6.1 30.2 48.4 0.0 9.8 6.1 11.6%
IP APPM 393.6 24.2% 15,651.5 17,146.4 7.7 0.7 23.1 25.5 28.3 17.0 15.4 13.9 10.7%
Average 7.9 2.3 9.1 10.3 8.6

Price Net EPS P/E FCF

Market Cap EV EV/
Global Players (In USD) YTD Debt/
04/08/2018 (USD mn) (USD mn) EBITDA 2018 2019E 2020E 2018 2019E 2020E Yield
EBITDA
International Paper 52.6 -12.1% 21,486.5 31,235.5 8.3 2.6 3.5 5.1 5.7 15.2 10.4 9.2 1.3%
Nine Dragons 1.3 -22.7% 5,919.4 8,781.7 7.7 2.5 0.1 0.2 0.2 10.4 6.5 6.7 0.1%
Mondi PLC 2,906.9 15.7% 14,079.9 15,588.4 9.5 0.9 168.9 194.3 204.8 17.2 15.0 14.2 3.2%
Average 8.5 2.0 14.3 10.6 10.0
Source: Company, Bloomberg, Investec Securities estimates

Page 86 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Valuation
Historical P/E ratio [12 month forward] Relative P/E ratio [12 month forward]
P/E (x) Stock Price (Rs.) 1.4 Relative P/E (X)
25.0 550

1.2
450
20.0
1.0
350
15.0 12.0 0.8 0.7
11.6 250
8.7 0.6 0.5
0.5
10.0 5.9 0.3
150 0.4

5.0 0.2
50

0.0
0.0 -50 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18
Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18
P/E Average P/E Close Price Relative P/E Average Relative P/E

Source: Company, BSE, Investec Securities estimates Source: Company, Bloomberg, Investec Securities estimates

Historical EV/EBITDA [TTM] Historical P/B ratio

14.0 EV/EBITDA (X) 2 P/B (X)

1.8
12.0
1.6
1.6
10.0
1.4
1.2
8.0
7.4 1.2
5.4 5.3 0.9
1
6.0
0.8
4.0
0.6

2.0 0.4
Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18
P/B Average P/B
EV/EBITDA Average EV/EBITDA

Source: Company, BSE, Investec Securities estimates Source: Company, BSE, Investec Securities estimates

Page 87 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Valuation
Historical Price/Sales Net Debt/EBITDA
P/S (X) 7.0 Net Debt/EBITDA (x)
1.2

1.1
6.0
1

0.9 5.0
0.7
0.8

0.7 0.6 4.0

0.6
0.6
3.0
0.5 0.5

0.4 2.0

0.3
1.0
0.2
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18
P/S Average P/S

Source: Company, BSE, Investec Securities estimates Source: Company, Investec Securities estimates

Net Debt/Equity
2.0 Net Debt/Equity (x)

1.8

1.6

1.4

1.2

1.0

0.8

0.6

0.4

0.2
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Source: Company, Investec Securities estimates

Page 88 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Valuation
Du Pont

Du Pont FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
EBIT Margins (%) 14.5% 8.3% 16.4% 17.3% 20.0% 17.7% 19.1% 17.3% 10.9% 13.3% 14.5% 18.0% 18.4% 18.9% 7.0% 14.0% 16.5%
Asset Turnover (x) 0.7X 0.9X 0.9X 0.7X 0.8X 0.7X 0.5X 0.5X 0.7X 0.9X 1.0X 0.7X 0.6X 0.8X 0.9X 1.0X 1.0X
Interest Burden (x) 0.8X 0.7X 0.8X 0.9X 0.9X 0.7X 0.8X 0.8X 0.2X 0.5X 0.6X 0.6X 0.7X 0.5X -0.1X 0.5X 0.7X
Tax Burden (x) 0.8X 1.0X 0.8X 0.7X 0.7X 0.6X 0.8X 0.7X 0.4X 0.7X 0.8X 0.7X 0.8X 0.9X 1.5X 0.8X 0.8X
Equity Multiplier (x) 1.7X 1.6X 1.7X 2.1X 1.9X 2.2X 2.4X 2.4X 2.2X 2.0X 1.9X 2.5X 2.5X 2.2X 2.1X 2.0X 1.9X
ROAE 11.8% 8.2% 16.4% 15.3% 17.7% 13.4% 14.7% 13.0% 0.9% 8.8% 14.1% 13.9% 17.2% 15.5% -2.6% 11.8% 16.2%

Source: Company, Investec Securities estimates

Page 89 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Company Overview
Operations
TNPL was promoted by Government in 1979 with an installed capacity of 90,000 TPA of Newsprints and Writing Paper in Tamil Nadu. In 2010, the company stopped
manufacturing newsprints as it became economically unviable. It uses Bagasse for 60% of its production.

Gradually, the capacity was increased to 400,000 tonnes of Writing and Printing Paper and Packaging segment was added with 200,000 tonnes of capacity in FY17. The
company focuses on Maplitho paper which is used in notebooks. It sells 25% of its paper produced to Tamil Nadu government which uses it to manufacture books and another
25% is exported. The strong presence in South helps company to sell 50% of its dealer order book. Due to its large order book from Government, it is relatively less impacted
during downturns. TNPL also procures wood from government auctions.

The strong education demand in India on back of improvement in literacy rates is a major support for TNPL’s products demand. Multiple publications also source paper from
the organization. EBITDA margin has been one of the highest in the industry. In FY18, this EBITDA margin was impacted due to water shortage and bagasse shortage.
Normalization of this, will lead to better EBITDA margin future.

Future Plans
The Company has announced capacity expansion of 165,000 MT Printing paper and 400 TPD of Pulp.

Competition
The company has low competition as it has assured supply to government and export market. However, TNPL’s presence in non-southern markets is low. Currently, the
production is getting absorbed in its current market. Thus, as the company grows, it has to improve its network in non-southern markets.

Page 90 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Timeline 2008 : A new 300 TPD Hardwood Pulp &
2003 : Lost 26 machines days due to
1979 : Promoted by Tamil a 500 TPD Chemical Bagasse Pulp
water shortage.
Nadu Government. capacity have been installed [Reached
2003 : Entered into a long term 720 TPD pulp capacity]
1984 : Commissioned initial 2017 : Lost 25 machine days due
agreement with Sugar mills for procuring
capacity of 90,000 TPA of 2008 : Added 20 MW of turbo generator to water shortage.
bagasse in exchange for steam.
newsprints & Writing paper 2009 : Added 15,000 MT production 2017 : Commissioned a greenfield
2004 : Lost 37 machine days due to
along with 26 MW of Power. capacity. project of 200,000 TPA Multilayer
water shortage. Installed Rain water
1994 : First wind arm installed. 2010 : Discontinued manufacturing Coated Paper Board, along with a
harvesting system.
1995 : Added power capacity. newsprints as it was no longer 35 MW captive co-generation
1996 : Added 90,000 TPA 2004 : TN government allotted 756 acres power plant.
economical
additional paper capacity. of land to TNPL under Waste Land
2011 : Added 30 TPD hardwood pulp 2018 : Lost 118 machine days due
Development Programme for pulp wood
capacity & 130 TPD of Chemical pulp to water shortage.
cultivation
2004 : Added wind capacity 2011 : The plantation programmes
started yielding benefits

1979 1998 2003 2005 2008 2011 2017

2004 : Entered into long term agreement with 2012 : Installed a new Paper Machine with
1998/1999/2000 : Problems with TAFCORN to supply 70% of Eucalyptus wood a production capacity of 1,55,000 MTPA.
intake of water from river affected production for 15 yrs. 2014 : Augmented power capacity.
production 2005 : Lost 58 machine days due to water shortage. 2014 : Commissioned a 600 TPD Cement
2002 : Added power capacity & 2005 : Developed two plantation schemes – Farm plant to produce cement using the mill
became self sufficient in power forestry & Captive plantation. waste materials namely lime sludge and Fly
2002 : 50,000 TPA rebuilt by 2005 : An agreement has been entered with a Sugar ash.
increasing machine operating mill for sourcing bagasse [55,000 MTPA bagasse]. 2014 : The company installed a new 300
speed at Rs. 140 Crs TPD deinked pulp .
2006 & 2007 : Installed Wind Power Generators.
2016 : Cement production capacity was
increased from 600 TPD to 900 TPD.

Source: Company, Investec Securities estimates

Page 91 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Insider Ownership
# of shares as on Mkt value
Beneficial owner % of total shares outstanding
30th June 2018 (in '000s) (In Rs. Mn)

Governor of Tamilnadu 24,445 7,236 35.3%

Source: Company, Investec Securities estimates

Page 92 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Institutional Ownership
# of shares as on Mkt value % of total shares
Beneficial owner
30th June 2018 (in '000s) (In Rs. Mn) outstanding

Life Insurance Corp. of India 6,306.0 1,866.6 9.1%

HDFC Asset Management Co. Ltd. (Invt Mgmt) 3,520 1,041.9 5.1%

Aditya Birla Sun Life AMC Ltd. 3,436 1,017.1 5.0%

Central Government/ State Government(s)/ President of India 2,808 831.2 4.1%

General Insurance Corp. of India (Invt Port) 2,110 624.6 3.0%

Norges Bank Investment Management 1,770 523.9 2.6%

United India Insurance Co. Ltd. 1,606 475.4 2.3%

Credit Suisse AG 1,300 384.8 1.9%

SBI Funds Management Pvt Ltd. 1,297 383.9 1.9%

ICICI Lombard General Insurance Co. Ltd. 810 239.8 1.2%

Others 3,873 1,146.3 5.6%

Total 28,836 8,535.3 41.7%

Source: Company, Investec Securities estimates

Page 93 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Management Team

Manager Joining Yr Affiliation Brief profile

 He has held many positions in the departments of Government of Tamil Nadu. Served as
Collector, Kancheepuram District, Anna Institute of Management, Tamil Nadu Housing
Thiru S. Sivashanmugaraja 2017 Managing Director
Board, SIDCO and the office of the Hon’ble Governor of Tamil Nadu.
 Qualifications - B.Sc., B.E. (Civil) and IAS [2003]
 Has 33 years of experience in the Paper Industry, including 23 years at ITC Ltd. (Paper
Thiru SVR Krishnan N/A* ED Operations Division), and 10 years at Balakrishna Industries Ltd.
 Qualification: EMBA (IIBM); PDMM; BSc. - Physics
 38 years of combined experience in India and abroad, and has held senior management
positions in Ballarpur Industries Ltd., Asia Pulp and Paper Ltd., International Paper India
Thiru Avtar Singh Matharu N/A* ED Marketing
Pvt. Ltd. And Khanna Paper Mills.
 Qualification: A.M.I.E PG Diploma in Business Management
 Post Qualification 31 years of experience in Finance, Acc’s and Treasuries, in
Commodities, Power and Telecom; Associated with Vedanta Ltd. For 26 years before
Thiru V Ramanathan N/A* CFO
joining TNPL as CFO.
 Qualification: BSc., FCA

 Paper mill experience of over 34 years. Previously worked at Ballarpur Industries Ltd.
Thiru Kushal Pal Singh N/A* CGM Board Plant
 Qualification: B.E (Pulp and Paper Technology) Diploma in Pulp and Paper Technology.

 A total of 33 years experience in TNPL , started out as an Engineer (Trainee) in 1983

Thiru K Thangaraju N/A* GM Paper /Production
 Qualification: BSc., B.Tech, PGDBA, PGDCA

 Combined 28 years experience in Fertilizer, and PVC Plant Operations, Maintenance,

Erection and Commissioning in Project Management
Thiru A Balasubrmanian N/A* GM (E&I)
 Worked at SPIC and Chemplast and in L&T
 Qualification: B.E (Hons) – Electrical and Electronics MBA (Personnel)

Source: Company, Investec Securities estimates

Page 94 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Board of Directors
Director Joining Yr Affiliation Brief profile
 He served on TNPL’s Board as a Nominee Director of GOTN, holding positions as Non-
Executive Director of the Company from May 2005 to January 2007.
 He has held numerous positions in departments of Government of Tamil Nadu and was
Thiru K Gnanadesikan, IAS 2018 Chairman Director /MD in many State Owned Companies.
 Currently, he holds the position of Additional Chief Secretary to Government, Industries
Dept.
 Qualifications - M.Sc. (Social Sciences) (UK), B.E. (Hons) (E&CE) and IAS [1982]
Thiru S. Sivashanmugaraja
2017 Managing Director  See profile in prior section
IAS
 He has 31 years of service in various departments of Government of Tamil Nadu. Currently,
Non Executive
Thiru K Shanmugam IAS 2016 he holds the position of Additional Chief Secretary to Government, Finance Department.
Director
 Qualifications - MSc (Agriculture), IAS [1985]
 With more than two decades of experience in Capital Markets & Financial Services Industry,
he has been the Chairman of Federation of Indian Stock Exchanges - FISE and a Member of
Independent
Thiru V Nagappan 2013 Secondary Markets Advisory Committee (SMAC) of SEBI. He is currently the Member of the
Director
Advisory Committee of SEBI.
 Qualifications - B. Com , MBA
 He was the former Chief Secretary to the Government of Tamil Nadu.
 He has served on TNPL Board as nominee Director of GOTN from 1989 till 1995. He was
Independent also CMD of the Company from 1998 to 2002 and again Nominee Director from 2002 to
Thiru V Narayanan 2002
Director 2005. As he has been on the Board of TNPL for more than 13 years, he has extensive
experience in paper industry.
 Qualifications – Electrical Engineer , IAS [1970]
 He was the former Chief Secretary to the Government of Tamil Nadu.
 He has served on TNPL Board as nominee Director of GOTN from 1989 till 1995. He was
also CMD of the Company from 1998 to 2002 and again Nominee Director from 2002 to
Thiru Narayanan, IAS Independent 2005. As he has been on the Board of TNPL for more than 13 years, he has vast experience
1989
(Retd.) Director in paper industry.
 Qualifications – Electrical Engineer , IAS [1970]

Page 95 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Director Joining Yr Affiliation Brief profile
 She worked for 39 years as officer in State Bank of India from 1975 to 2014 with various
responsibilities.
 Served on the Boards of SIDBI Ventures, SBICIL (State Bank of India Commercial and
Independent International Bank Ltd.) and CERSAI (Central Registry of Securitization Asset
Tmt. Soundara Kumar 2017 Reconstruction and Securities Interest)
Director
 She served as a member of RBI Working Group to recommend measures for scaling up the
Business Correspondent (BC) model for Financial Inclusion and participated in several panel
discussions etc. relating to SME, Stressed Assets Management etc.
 Qualifications - B.Sc (Maths), C.A.I.I.B
 He has worked for nearly 32 years in Finance and Investment functions of Life Insurance,
Housing Finance and Mutual Fund in LIC.
Thiru V Chandrasekaran 2017
Independent  He serves on the board of various companies including Dena Bank, UTI Venture Funds
Director Management Company Pvt. Ltd, Legal Entity Identifier India Ltd and LICHFL Asset
Management Company Ltd.
 Qualifications - B.Com, F.C.A.
 She has held various key positions in Depts of Govt of Tamil Nadu as Sub-Collector
Tmt. Anu George, IAS 2017 Director Tiruppattur, Additional Collector - Tiruvannamalai, Deputy Commissioner - Education, etc.
 Qualifications – IAS [2003]

Source: Company, Investec Securities estimates

Page 96 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Financial Models – Quarterly Income Statement
Quarterly Income Statement Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18
Revenues 6,476.3 5,551.4 4,811.2 7,336.5 7,564.3 6,789.8 7,122.8 8,020.6 5,634.8 5,360.3 9,441.9 10,505.3
% YoY 33.4% 17.5% 1.4% 4.3% 16.8% 22.3% 48.0% 9.3% -25.5% -21.1% 32.6% 31.0%
EBITDA 1,364.7 1,410.7 1,135.0 1,820.2 1,799.5 1,764.1 1,893.1 1,832.8 309.5 672.3 1,453.0 1,609.2
% of sales 21.1% 25.4% 23.6% 24.8% 23.8% 26.0% 26.6% 22.9% 5.5% 12.5% 15.4% 15.3%
Depreciation 352.4 334.0 346.0 373.0 463.9 528.7 542.7 541.6 543.5 546.5 558.3 570.0
Operating Profit 1,012.3 1,076.7 789.0 1,447.2 1,335.6 1,235.4 1,350.4 1,291.2 -234.0 125.8 894.7 1,039.2
% of sales 15.6% 19.4% 16.4% 19.7% 17.7% 18.2% 19.0% 16.1% -4.2% 2.3% 9.5% 9.9%

Interest expenses 385.0 343.2 276.6 358.3 646.0 513.3 676.3 684.7 631.6 582.2 653.4 579.1
Other income 29.2 32.8 42.0 77.5 87.3 73.0 99.8 109.6 68.5 74.8 81.1 116.4
Exceptions - - - - - - - - - - - -
PBT 656.5 766.3 554.4 1,166.4 776.9 795.1 773.9 716.1 -797.1 -381.6 322.4 576.5
% to net sales 10.1% 13.8% 11.5% 15.9% 10.3% 11.7% 10.9% 8.9% -14.1% -7.1% 3.4% 5.5%

Tax 140.1 167.9 115.7 210.2 81.8 89.3 163.3 82.0 94.4 -249.6 51.4 245.5
Eff tax rate (%) 21.3% 21.9% 20.9% 18.0% 10.5% 11.2% 21.1% 11.5% -11.8% 65.4% 15.9% 42.6%
PAT 516.4 598.4 438.7 956.2 695.1 705.8 610.6 634.1 -891.5 -132.0 271.0 331.0
% to net sales 8.0% 10.8% 9.1% 13.0% 9.2% 10.4% 8.6% 7.9% -15.8% -2.5% 2.9% 3.2%

EPS [fully diluted] 7.5 8.7 6.3 13.8 10.0 10.2 8.8 9.2 -12.9 -1.9 3.9 4.8
% YoY 96.8% 78.7% 16.5% 37.9% 34.6% 17.9% 39.1% -33.7% -228.3% -118.7% -55.6% -47.8%
Source: Company, Investec Securities estimates

Page 97 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Financial Models – Annual Income Statement
Income Statement FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Revenues 10,664.6 10,256.8 12,085.0 15,229.2 18,612.6 22,852.2 21,357.3 24,175.4 29,496.8 30,942.3 35,616.5 38,579.9
% YoY 13.6% -3.8% 17.8% 26.0% 22.2% 22.8% -6.5% 13.2% 22.0% 4.9% 15.1% 8.3%
EBITDA 2,554.6 2,637.0 3,160.6 3,194.8 4,021.5 5,064.9 5,057.5 5,668.6 7,288.8 4,044.0 7,028.6 8,659.8
% of sales 24% 26% 26% 21% 22% 22% 24% 23.4% 24.7% 13.1% 19.7% 22.4%
Depreciation 1,008.0 1,155.6 1,233.7 1,690.5 1,749.9 1,923.2 1,373.0 1,437.7 2,076.8 2,218.3 2,271.5 2,513.6
Operating Profit 1,546.6 1,481.4 1,926.9 1,504.3 2,271.6 3,141.7 3,684.5 4,230.9 5,212.0 1,825.7 4,757.1 6,146.2
% of sales 15% 14% 16% 10% 12% 14% 17% 17.5% 17.7% 5.9% 13.4% 15.9%

Interest expense 492.7 461.8 442.4 1,412.7 1,209.7 1,282.1 1,549.3 1,218.5 2,520.2 2,446.3 2,339.8 2,124.0
Other income 338.4 479.4 165.4 160.7 199.2 167.2 166.4 223.3 369.5 340.8 237.3 237.3
Exceptions 185.4 81.8 301.5 998.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
PBT 1,577.7 1,580.8 1,951.4 1,251.2 1,261.1 2,026.8 2,301.6 3,235.7 3,061.3 -279.8 2,654.6 4,259.5
% to net sales 15% 15% 16% 8% 7% 9% 11% 13.4% 10.4% -0.9% 7.5% 11.0%

Tax 504.7 320.0 461.5 161.7 346.3 415.0 634.0 637.7 416.4 141.7 566.5 909.0
Eff tax rate (%) 32% 20% 24% 13% 27% 20% 28% 19.7% 13.6% -50.6% 21.3% 21.3%
PAT 1,073.0 1,260.8 1,489.9 1,089.5 914.8 1,611.8 1,667.6 2,598.0 2,644.9 -421.5 2,088.1 3,350.5
% to net sales 10% 12% 12% 7% 5% 7% 8% 10.7% 9.0% -1.4% 5.9% 8.7%

EPS [Fully Diluted] 15.4 17.6 18.5 15.7 13.2 23.3 24.1 37.5 38.2 -6.1 30.2 48.4
% YoY -5.7% 14.7% 5.1% -15.1% -16.0% 76.2% 3.4% 55.8% 1.8% -115.9% NA 60.5%

DPS 4.5 4.5 5.0 5.0 5.0 6.0 6.0 7.5 7.5 5.0 5.0 5.0
% YoY 0.0% 0.0% 11.1% 0.0% 0.0% 20.0% 0.0% 100.0% 0.0% -33.3% 0.0% 0.0%
Source: Company, Investec Securities estimates

Page 98 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Financial Models – Balance Sheet
Balance Sheet FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Net worth 6,643.2 8,045.0 9,157.9 9,706.9 10,354.8 11,459.8 12,016.4 15,096.0 17,046.5 16,031.3 17,702.9 20,636.8
Equity capital 693.8 693.8 693.8 693.8 693.8 693.8 693.8 693.8 693.8 693.8 693.8 693.8
Reserves 5,949.4 7,351.2 8,464.1 9,013.1 9,661.0 10,766.0 11,322.6 14,402.2 16,352.7 15,337.5 17,009.1 19,943.0
Debt 8,064.5 13,629.1 14,881.0 17,337.9 15,002.1 14,751.1 20,656.6 26,868.9 28,234.2 25,964.0 23,523.6 23,377.1
Deferred tax liab 2,198.5 2,101.3 2,496.1 2,697.6 2,904.6 3,166.4 3,595.9 2,337.9 2,058.3 2,216.6 2,216.6 2,216.6
Others 0.0 0.0 0.0 743.4 839.7 915.4 1,013.3 1,004.0 1,055.5 1,103.9 1,103.9 1,103.9
Total 16,906.2 23,775.4 26,535.0 30,485.8 29,101.2 30,292.7 37,282.2 45,306.8 48,394.5 45,315.8 44,547.0 47,334.4

Capitalised assets 12,212.6 12,537.1 22,070.9 22,000.9 21,053.5 24,544.2 24,259.2 24,444.4 41,069.9 40,779.8 39,608.3 42,094.7
Capital WIP 2,627.0 8,525.0 1,305.2 3,137.9 4,568.6 949.9 6,312.3 18,145.5 590.2 181.4 181.4 181.4
Investments 11.4 114.0 11.4 11.4 11.4 11.4 11.4 9.9 10.7 10.3 10.3 10.3
Cash 176.7 193.6 122.2 197.4 245.1 122.1 203.3 162.1 214.5 272.0 200.0 200.0
Non Current Assets 1,878.5 2,405.8 1,797.0 4,036.6 2,319.7 2,184.1 2,447.2 1,612.3 5,436.2 3,288.5 3,763.2 4,064.2
Others 0.0 0.0 1,228.3 1,101.5 902.5 2,481.0 4,048.8 932.6 1,069.8 783.8 783.8 783.8
Total 16,906.2 23,775.5 26,535.0 30,485.7 29,100.8 30,292.7 37,282.2 45,306.8 48,391.3 45,315.8 44,547.0 47,334.4

Balance Sheet Key Ratios FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Net Debt 7,887.8 13,332.9 14,758.8 17,140.5 14,757.0 14,629.0 20,453.3 26,706.8 28,019.7 25,681.7 23,313.3 23,166.8

Net Debt/Equity 1.2X 1.7X 1.6X 1.8X 1.4X 1.3X 1.7X 1.8X 1.6X 1.6X 1.3X 1.1X
Interest Coverage Ratio 3.1X 3.2X 4.4X 1.1X 1.9X 2.5X 2.4X 3.5X 2.1X 0.7X 2.0X 2.9X
Working Capital Ratios
Inventory Turns 67.2X 60.2X 61.9X 78.5X 51.9X 45.6X 74.1X 58.5X 70.7X 57.1X 57.1X 57.1X
Receivable Turns 58.1X 71.0X 62.2X 87.2X 54.3X 60.2X 85.7X 73.3X 65.6X 70.6X 70.6X 70.6X
Payable Turns 60.5X 49.8X 59.9X 82.0X 79.7X 74.4X 99.2X 88.4X 69.0X 90.7X 90.7X 90.7X
Other Turns -0.6X 4.2X -9.9X 13.0X 19.0X 3.5X -18.8X -19.1X 0.0X 1.7X 1.5X 1.4X
Net Working Capital days 64.3X 85.6X 54.3X 96.7X 45.5X 34.9X 41.8X 24.3X 67.3X 38.8X 38.6X 38.5X

Fixed Asset Turns 507.9X 749.5X 706.0X 602.5X 502.5X 407.2X 522.5X 369.1X 508.2X 548.9X 488.1X 497.9X
Source: Company, Investec Securities estimates

Page 99 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Financial Models – Cash Flow
Cash Flow FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Profit Before Tax & Exceptional items 1,392 1,499 1,650 252.3 1,261.1 2,026.8 2,301.6 3,788.4 2,954.5 -279.8 2,654.6 4,259.5
Adjustments 1,475 1,292 1,488 3,807.5 2,694.9 2,768.4 2,312.8 1,994.3 3,742.5 4,522.9 4,044.8 3,728.5
Changes in Working Capital - - - 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Cash flow from Operating Activities 1,451 2,091 2,748 3,057.7 6,324.8 5,236.1 4,031.9 5,782.8 6,697.0 4,243.1 6,699.4 7,988.1

(Purchase)/ Sale of Fixed Assets -2,991.8 -7,242.3 -2,842.7 -2,883.8 -1,934.9 -2,930.9 -7,501.2 -9,029.0 -988.0 -1,519.4 -1,100.0 -5,000.0
(Purchase) / Sale of Investment 160.1 -102.6 102.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Investment Income 45.4 39.1 63.1 65.9 55.4 92.2 103.0 76.0 93.6 0.0 0.0 0.0
Other Investment Activities 9.7 11.0 0.0 0.0 0.0
Cash flow from Investment Activities -2,786.3 -7,305.8 -2,677.1 -2,817.9 -1,879.5 -2,838.7 -7,398.2 -8,943.4 -883.4 -1,519.4 -1,100.0 -5,000.0

Issue/ (Repayment) of Borrowings 1,976 6,048 1,258 1,724.9 -2,484.5 -740.2 5,834.3 5,802.9 1,363.3 -2,270.2 -2,440.4 -146.6
Proceeds/ (Buyback) from Issue of Equity - - - - - - - - -
Interest Paid -492.9 -452.1 -1,037.5 -1,488.0 -1,437.1 -1,375.2 -1,901.1 -2,598.1 -2,626.0 -2,446.3 -2,339.8 -2,124.0
Dividend Paid -202.4 -364.4 -363.2 -402.2 -402.2 -404.9 -485.8 -499.8 -624.8 -624.8 -416.5 -416.5
Cash from financing 1,280.8 5,231.8 -143.0 -165.3 -4,323.8 -2,520.2 3,447.3 2,705.0 -1,887.5 -5,341.3 -5,196.7 -2,687.1

Change of cash -54.5 16.8 -72.2 74.5 121.5 -122.9 80.9 -455.6 3,926.2 -2,617.6 402.7 301.0

FCFF -1,540.8 -5,151.6 -94.8 173.9 4,315.9 2,305.2 -3,469.4 -2,832.6 1,834.1 5,364.5 5,124.7 2,687.1
FCFE -1,540.8 -4,862.9 -94.8 173.9 4,315.9 2,305.2 -3,469.4 2,970.4 3,197.4 3,094.3 2,684.3 2,540.5
Source: Company, Investec Securities estimates

Page 100 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

Summary Financials (INRm) Year end: 31 March

Income Statement 2016 2017 2018 2019E 2020E Cash Flow 2016 2017 2018 2019E 2020E Balance Sheet 2016 2017 2018 2019E 2020E
Revenue 24,175.4 29,496.8 30,942.3 35,616.5 38,579.9 Operating profit 4,230.9 5,212.0 1,825.7 4,757.1 6,146.2 Property plant and equipment 42,589.9 41,660.1 40,961.2 39,789.7 42,276.1
EBITDA 5,668.6 7,288.8 4,044.0 7,028.6 8,659.8 Depreciation & amortisation (4,230.9) (5,212.0) (1,825.7) (4,757.1) (6,146.2) Intangible assets 0.0 0.0 0.0 0.0 0.0
Depreciation and amortisation 4,230.9 5,212.0 1,825.7 4,757.1 6,146.2 Other cash and non-cash movements 5,216.2 5,032.3 1,938.5 4,926.2 6,773.1 Investments and other non current assets 942.6 1,080.5 794.1 794.1 794.1
Operating profit 4,230.9 5,212.0 1,825.7 4,757.1 6,146.2 Change in working capital 413.7 (3,874.9) 2,640.8 (474.7) (301.0) Cash and equivalents 162.1 214.5 272.0 200.0 200.0
Other income 223.3 369.5 340.8 237.3 237.3 Operating cash flow 5,629.9 1,157.4 4,579.3 4,451.4 6,472.1 Other current assets 1,761.6 2,336.1 2,390.0 2,390.0 2,390.0
Net interest 1,218.5 2,520.2 2,446.3 2,339.8 2,124.0 Interest 1,132.9 2,415.6 2,446.3 2,339.8 2,124.0 Total assets 54,186.8 56,303.2 55,246.6 55,639.0 59,162.5
Share-based-payments 0.0 0.0 0.0 0.0 0.0 Tax paid (566.3) (750.9) (141.7) (566.5) (909.0) Total debt 26,868.9 28,234.2 25,964.0 23,523.6 23,377.1
PBT (normalised) 3,235.7 3,061.3 (279.8) 2,654.6 4,259.5 Dividends from associates and JVs (0.1) 0.0 0.0 0.0 0.0 Preference shares 0.0 0.0 0.0 0.0 0.0
Impairment of acquired intangibles 0.0 0.0 0.0 0.0 0.0 Cash flow from operations 6,196.5 2,822.1 6,883.9 6,224.7 7,687.1 Other long term liabilities 2,337.9 2,061.5 2,219.7 2,219.7 2,219.7
Non-recurring items/exceptionals 3,235.7 3,061.3 (279.8) 2,654.6 4,259.5 Maintenance capex (9,029.0) (988.0) (1,519.4) (1,100.0) (5,000.0) Provisions & other current liabilities 2,663.3 2,007.4 2,007.4 2,007.4 2,007.4
PBT (reported) 3,235.7 3,061.3 (279.8) 2,654.6 4,259.5 Free cash flow (2,832.6) 1,834.1 5,364.5 5,124.7 2,687.1 Pension deficit and other adjustments 0.0 0.0 0.0 0.0 0.0
Taxation 637.7 416.4 141.7 566.5 909.0 Expansionary capex 0.0 0.0 0.0 0.0 0.0 Total liabilities 39,090.8 39,259.9 39,215.3 37,936.1 38,525.7
Minorities & preference dividends 0.0 0.0 0.0 0.0 0.0 Exceptionals & discontinued operations 0.0 0.0 0.0 0.0 0.0 Net assets 93,277.6 95,563.1 94,461.9 93,575.0 97,688.2
Discontinued/assets held for sale 0.0 0.0 0.0 0.0 0.0 Other financials (2,522.2) (2,532.4) (2,446.3) (2,339.8) (2,124.0) Shareholder's equity 15,096.0 17,046.5 16,031.3 17,702.9 20,636.8
Net Income (normalised) 2,959.5 2,575.3 (390.5) 0.0 0.0 Acquisitions 0.0 0.0 0.0 0.0 0.0 Minority interests 0.0 0.0 0.0 0.0 0.0
Attributable profit 2,598.0 2,644.9 (421.5) 2,088.1 3,350.5 Disposals 0.0 0.0 0.0 0.0 0.0 Total equity 15,096.0 17,046.5 16,031.3 17,702.9 20,636.8
EPS (reported) 37.5 38.2 (6.1) 30.2 48.4 Net share issues 0.0 0.0 0.0 0.0 0.0 Net working capital 1,931.3 5,831.3 3,570.8 3,973.5 4,274.5
EPS (norm., cont.) – FD (INR) 37.5 38.2 (6.1) 30.2 48.4 Dividends paid (499.8) (624.8) (624.8) (416.5) (416.5) NAV per share (INR) 218.1 246.3 231.6 255.8 298.2
EPS (norm., cont., IAS19R adj.) – FD - - - - - Change in net cash (5,854.6) (1,323.0) 2,293.5 2,368.4 146.6
DPS (INR) 0.5 1.5 2.5 2.5 2.5 Net cash/(debt) (41.9) 51.3 54.3 (72.0) 0.0
Average number of group shares - FD (m) 69.2 69.2 69.2 69.2 69.2 FCFPS - FD (INR) (40.9) 26.5 77.5 74.0 38.8
Average number of group shares (m) 69.2 69.2 69.2 69.2 69.2
Total number of shares in issue (m) 69.2 69.2 69.2 69.2 69.2
Source: Company, Investec Securities estimates

Page 101 | 06 August 2018 | Tamil Nadu Newsprint Papers Ltd

West Coast Paper Mills (WCPM.NS)
West Coast Paper Mills (WCPM), one of the top branded paper company in the country, is benefitting from a
HOLD
consolidating industry in India and overseas. WCPM has successfully delevered its balance sheet over the
past few years, and we expect it to be practically debt free by FY20. The management team is one of the more
Price: INR319 Target Price: INR334
experienced teams in the industry, and has built a solid distribution network making it capable of quickly
expanding capacity and sales. Valuation of 7.6% FY18 FCF yield, 10x FY18E P/E (Target multiple of 8x FY20E Market Cap: INR21bn
EPS, a slight discount to JK paper) is supportive, even as we expect strong cash flow to continue. However, Forecast Total Return: 5.4%
a track record of unrelated diversification makes us somewhat cautious, and we initiate at HOLD.
2016A 2017A 2018A 2019E 2020E
 WCPM is one of the top paper companies in the country by size – it operates a 320,000 integrated Revenue (INRm) 17,000.4 17,693.4 17,102.0 19,708.9 20,705.7
paper mill, with sufficient pulping capacity, and a 75 MW power plant. An optimal size of the plant, it EBITDA (INRm) 2,495.3 3,380.6 3,628.6 4,697.3 5,125.2
EBITA (INRm) 1,351.7 2,270.8 2,466.3 3,396.7 3,774.7
is amongst the more profitable paper companies in India today – FY18 EBITDA margin of 21.2%, and
PBT (normalised) (INRm) 670.3 1,778.8 2,225.6 3,101.1 3,536.0
RoIC of 14.7%. WCPM also enjoys adequate supply of water, a key ingredient in paper making, Net Income (normalised) (INRm) 484.3 1,285.0 2,232.2 2,418.9 2,758.0
ensuring a disruption free production schedule. EPS (norm. cont.) – FD (INR) 7.3 19.5 33.8 36.6 41.8
FCFPS - FD (INR) 20.0 59.9 28.3 12.9 48.4
 We expect the paper cycle to remain buoyant, which should support profitability of top paper companies like DPS (INR) 0.5 1.5 2.5 2.5 2.5
WCPM. Over the past 2 years, WCPM has generated over Rs.5,825.6 mn of free cash flow as it has taken
PE (normalised) (x) 43.6 16.4 9.5 8.7 7.7
advantage of the 2nd widest distribution network as the paper cycle recovered. EV/sales (x) 1.1 1.1 1.1 1.0 0.9
EV/EBITDA (x) 7.6 5.6 5.2 4.0 3.7
 WCPM has successfully delevered over the past 2 years, and is practically debt free today. While a FCF yield (%) 6.2 18.7 8.9 4.0 15.2
solid balance sheet positions WCPM to be one of the consolidators, a bank default in one of the group Dividend yield (%) 0.2 0.5 0.8 0.8 0.8
companies has created a stumbling block in the NCLT process. This means that expansion by WCPM
has to be organic, making its desire of expanding its manufacturing footprint more challenging than
its competitors. For instance, it was ruled out of the NCLT process for Sirpur Mills, which eventually
has been acquired by JKPL.
 Like the other majors, WCPM has also sought to control its supply chain for wood fibre. However,
success has been somewhat mixed, and it still imports ~43% of its requirement of wood fibre. This
exposes WCPM to price volatility of fibre, which has been a key risk for the industry in the past. Target Price Basis Key Risks

 WCPM is one of the top paper companies in India, and has established a good brand, and a solid 8x FY20 PE Cyclicality from falling pulp prices and
Unrelated diversification
distribution network. It is trading at 9.5x FY18 P/E, with solid FCF generation capability - WCPM
generated ~Rs. 1,872.3 mn FCF in FY18, a yield of 7.9% on Enterprise Value. From a valuation
perspective, the stock is inarguably attractive. However, we are cautious owing to WCPM’s propensity
of unrelated diversification, and a relatively patchy track record of past acquisitions (see Table on page
114) Therefore, we initiate on WCPM with a HOLD rating, and Price Target of Rs334. We will become
more constructive, if we get comfort on WCPM’s capital use policies.

Page 102 | 06 August 2018 | West Coast Paper Mills

Investment Positives
Key Positives Details

WCPM has a fully integrated paper mill with pulping capacity of 725 tpd. The mill is located in Dandeli at Karnataka on the banks of
Kali River. Thus, it has year round availability of water from the river. In addition, the region receives adequate rainfall, ranging between
Integrated pulp mill with 150 cm and 200 cm.
adequate water and power
WCPM has captive power generating capacity of 74.8 MW. Surplus power capacity of 20 MW is sold to Tamil Nadu State Electricity
Board (TSEB).

Expect the paper cycle to We expect the current strong paper realization cycle to sustain in the domestic market, which should help keep margins elevated
remain beneficial, supporting across the sector. Larger surviving companies in the Indian paper industry have successfully backward integrated to varying extent,
profitability and at today’s paper prices are reasonably profitable, evidence of cost\capital efficiencies that these players have been able to achieve.

WCPM’s strong pan-India distribution network with over 70 dealers operating from almost every state ensures effective reach of the
products and services to the end users across the country. Of which, around 75% of the company’s dealers have been associated
Strong dealer network
with the company for over 15 years. It has 6 zonal offices in main cities of India. WCPM’s distribution network is second only to JKPL’s
in the country.

Multiple product offering with WCPM has multiple product variants catering to commercial, and premium segment in Writing & Printing, Packaging and Value added
focus on higher margin products. The company consciously exited less remunerative segments and now focusses on higher margin products. This has led to
products improvement in realisations.

WCPM has been generating solid free cash flow, and as a result its Net Debt/Equity is 0.3x. It has generated average annual Free
Solid Balance Sheet Cash Flow of ~Rs200cr over past 5 years, which provides them the wherewithal to fund future expansion – is keen for geographical
expansion, but has not been able to get the right asset.

The promoter has been increasing shareholding in the company - increased to 56.0% in FY18 from 52.4% in FY12. The promoter
Promoter has been increasing
brought in capital of Rs.472.5 mn in the form of Equity when the Company needed funds to expand in FY11, and later infused Rs.179
stake in the Company
mn to reduce debt in FY13.

Page 103 | 06 August 2018 | West Coast Paper Mills

Integrated pulp mill with adequate power and water availability
100% integrated pulp mill Adequate supply of water

 WCPM has fully integrated paper mill with in-house pulping capacity.  Access to water is very critical in paper making.
 It replaced its old 300 tpd pulp mill with ECF (Elemental Chlorine Free)  The company has perennial availability of water from River Kali. In
725 tpd pulp line in FY11. addition, there is adequate rainfall ranging between 150 cm and 200 cm
 The pulping machine replacement led to improvements in yield, reduced per annum at their mill’s location.
water consumption and effluent discharge.  In the past, WCPM has not faced any production disruption on account of
 We estimate that the company is entirely self-sufficient in meeting its water shortage.
pulping requirement.

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Power cost as % of net sales has been reducing, aiding margin Self-sufficiency in power has lowered cost for WCPM

Power cost (as a % of Sales)

 Complete self-sufficiency has been achieved in power. Captive power
16%
generating capacity is 74.8 MW. Surplus power capacity of 20 MW is sold to
15%
TSEB.
14%
 The company achieved 90% power self-sufficiency in FY01 itself. This
13%
provides it a greater ability to plan production schedules, and avoids
12%
unplanned downtime.
11%
 Partly aided by lower energy costs (coal prices), and partly owing to its
10%
successful backward integration, WCPM has lowered its power cost – power
9%
cost reduced from 11.4% of net sales in FY12 to 9.9% in FY18.
8%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Page 104 | 06 August 2018 | West Coast Paper Mills

Expect the paper cycle to remain beneficial, supporting margin
EBITDA margins to expand EBITDA margin should improve modestly, driven by additional cost
leverage
30% EBITDA Margin (%) (as a % of Sales)
100%
17% 18% 13% 15% 15%
90% 19% 21% 24% 25%
25% 8%
80% 7% 7%
9% 7% 6% 8%
6% 7% 8%
70% 6% 6% 7% 8% 8%
11% 10% 9% 7%
20% 11% 10% 9% 7% 6%
60% 10% 10% 10%
50%
15% 40%
30% 59% 62% 63% 62% 58%
56% 53% 51% 51%
10% 20%
10%
5% 0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
WCPM JKPL TNPL Raw Material cost Power Employee Cost Others EBITDA
(The numbers prior to FY12 are not comparable)

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

EBITDA margin will improve on back of increased in-sourcing from raw material

 The company is increasing its dependence on pulp imports by increasing its sourcing of fibre from farm forestry and domestic government auctions. While the extent
of backward integration for wood is not as high as JKPL, and TNPL, it has been improving over the past few years.
 Global pulp prices are tightening and thus, reliance on domestic supply is beneficial – domestic fibre prices are less elastic, and will help the company in reduce
costs.

Source: Company, Investec Securities estimates

Page 105 | 06 August 2018 | West Coast Paper Mills

Brand supported by strong dealer network – 2nd only to JKPL
77 total distributors, representing reasonably strong presence across the Country

 The Company has built a network of 77 dealers and 6 zonal offices in India.
 Of 77 dealers, around 75% of the Company’s dealers have been
associated with the Company for over 15 years.
 Apart from domestic sales, WCPM exports its products to 35 countries.
1
Punjab
 Our channel checks reveals strong dealer confidence in WCPM’s
7 products. The lead time for product supply in most cases is 1 day.
Delhi
 The recent price hikes by company have been easily absorbed in the
Rajasthan Uttar
2 Pradesh 3 Bihar
market, reflecting a strong demand for company’s products.
1

Gujarat Madhya 1 6
Pradesh West
2
1 Bengal
Chhattisgarh
16
Maharashtra

Telangana

The numbers in Red reflect number of dealers presence in respective State

Andhra
Pradesh
Karnataka represents Zonal Offices in respective States
5
16
represents mill location
Tamilnadu
4 12
Kerala

Source: Company, Investec Securities estimates

Page 106 | 06 August 2018 | West Coast Paper Mills

Multiple product offering with focus on higher margin products
Realizations have improved as they focus on value added products
70.0 Realisations for paper & board (Rs/Kg)
 WCPM consciously exited low margin segments like kraft paper and low
60.0
quality paper.
50.0
 WCPM has developed and introduced some new products and varieties
like Wesco Bond, Wesco Supershine, Wesco Duraprint, B2B 64 gsm 40.0

copier etc. to capture new markets, and improve product mix. 30.0

 Further, the company has shifted its focus from manufacturing duplex 20.0
board to different variants of cup stock paper having double digit growth
10.0
prospects & higher margins. Further, WCPM is known for its MICR
-
cheque papers. FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E

Source: Company, Investec Securities estimates

Multiple product offerings catering to both premium and economy needs

Printing and Stationary Cupstock Others

Brand GSM Brand GSM Brand GSM
Documate 65 WESCO Prime 160-230 Nova Print 54-90
B2B 70 WESCO Base 165-230 Wesco Duraprint 80-140
Azure Laid 70-110 WESCO Liner 165-230 Cartridge Paper 90-140
Copy Gold 75 WESCO Eco Liner 165-230 MICR Cheque Paper 95
Copy Plus 80 WESCO Parchment Paper 105-120
WESCO Bond 85 & 100 WESCO HB Greeting 170-250
WESCO Super Shine 90-140 WESCO Folding box board 190-250
Duplex Board Coated Super Grey Back 230-400
Coated Duplex Board Grey Back 230-570
Duplex Board Kraft Back 400-600

Source: Company, Investec Securities estimates

Page 107 | 06 August 2018 | West Coast Paper Mills

Solid balance sheet
Investment grade credit rating provides access to capital at lower cost WCPM has been able to raise capital easily in the past

Source Year Amt (Rs. Mn)

Long Term Short Term Global Depository Receipts (GDRs) FY08 354.7
Credit Rating Outlook
Rating Rating
India Ratings Stable A+ A1+ Qualified Institutional Placement FY08 499.9

CARE Stable A A1 8.5% Preference Shares FY09 650.0

12.5% Non-Convertible Debentures FY09 650.0

Term loans including Foreign currency
FY09 7,250.0
loans
Promoter infusion FY08-FY13 651.7

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Company is on path to become debt free by FY20E Interest coverage is very comfortable

13,000.0 Net Debt (in Rs mn.) Net Debt/Equity (x) 2.5

800 Interest (in Rs mn.) Interest coverage ratio (x)

11,000.0 120.0
700
2.0
9,000.0 100.0
600

7,000.0 500
1.5 80.0

5,000.0 400
60.0
1.0
3,000.0 300
40.0
1,000.0 200
0.5
20.0
-1,000.0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E 100

-3,000.0 0.0 - -
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Net Debt (LHS) Net Debt/ Equity (RHS)
Interest (LHS) Interest Coverage Ratio (RHS)

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Page 108 | 06 August 2018 | West Coast Paper Mills

Promoter has been increasing stake in the company
Promoter shareholding is at 56% as on Mar’18, a sign of confidence Promoter has brought capital in the company when required
57.0% (Promoter Shareholding %)
No. of Amount
Issue
56.0% Year shares contributed Required for
Price
issued (in Rs. mn)
55.0%
FY09 2,617,650 85.0 222.5 Expansion
54.0% FY10 3,000,000 45.0 135.0 Expansion
FY10 2,373,578 48.5 115.0 Expansion
53.0%
FY13 3,300,000 54.3 179.2 Debt Repayment
52.0% Total 651.7

51.0%

50.0%
Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18
Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Promoter has bought shares at almost every price over the past 4-5 yrs Shareholding pattern as on 30th June, 2018
Shares purchased in price ranges (in '000s)
250

200

Public, 27%
150
Promoters,
56%
100
Institutions,
17%
50

-
<50 50-100 100-150 150-200 200-250 >=250

Source: Bloomberg, Investec Securities estimates Source: Company, Investec Securities estimates

Page 109 | 06 August 2018 | West Coast Paper Mills

Investment Negatives
Key Negatives Details

WCPM’s efforts in farm forestry have fallen short, and it has to depend on imported wood chips and state auctions. However, its import
Not self-sufficient in wood dependency is reducing - WCPM’s imported 43% of its fibre requirement in FY18, down ~40% over the past 3 years. (see chart of
wood imports on page 112)

WCPM has been operating at close to 98% capacity for the past 4 years, leading to low single digit growth rates in sales volume, even
as profitability has been improving. However, profit growth is limited by WCPM to expand capacity – partly by expanding its
geographical footprint.
WCPM’s capacity expansion
plans could take time to We believe that sites with backward integration of wood, and good water availability, can be profitable. While WCPM has been trying
fructify to get access to such a site, efforts have so far not been successful. The company’s bid for Sirpur mill’s acquisition was rejected on
technical grounds of eligibility under Section 29A of the Insolvency and Bankruptcy Code (IBC), as a group company had been
classified as NPA in the past. This could prevent WCPM from bargain picking from the reasonably large number of companies in
distress.

Past acquisition track record The company has made some poor investment decisions in the past, impacting its ROAIC. Please see table of page 114 detailing
is concerning failed investments by WCPM – some of which are unrelated to its primary paper making business.

Page 110 | 06 August 2018 | West Coast Paper Mills

Not self-sufficient in wood
Dependence on imported wood chips and domestic government auctions
7.0 Imported wood chips (Lakh MT)
 In FY13, when domestic wood prices had increased by 34% in FY14, the
6.0 company started importing wood chips.
5.0  However, owing to recent sharp increase in global pulp prices, the

4.0
company has shifted its focus back to domestic procurement.
 In FY18, 43% of company’s pulp requirements were sourced from
3.0
imports, and WCPM is targeting to reduce imports to 25% in FY19.
2.0
 Additionally, eucalyptus cultivation ban by Karnataka State government
1.0 since Feb 2017 poses a new problem for the company to source wood.
0.0 WCPM has filed writ petition against the ban.
FY14 FY15 FY16 FY17 FY18

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

WCPM may benefit lower than others from Increasing global pulp prices Depreciating rupee makes it costlier to import
(Pulp Prices USD/ton) 70 (INR/USD)
1,250

1,150 69

1,050 68

950 67

850
66
750
65
650
64
550
63
450
Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18
62
Europe Pulp BHKP PIX Index USD Europe Pulp NBSK PIX Index USD Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Page 111 | 06 August 2018 | West Coast Paper Mills

WCPM’s capacity expansion plans could take time to fructify
Production growth post FY13 has been anaemic owing to capacity constraints
75% YoY Production growth (%)
 In FY 11, WCPM undertook major capacity expansion, which led to sharp
65%
increase in volume growth of 54%. This new capacity was 99% utilized
55%
45% by FY13, and volume growth has slowed since.
35%  As per our channel checks, there is demand for the company’s products
25%
and, in our opinion, capacity expansion by WCPM (organic/inorganic)
15%
5%
should be profitable.
-5% FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17  However, capacity expansion in the paper industry, especially greenfield,
-15%
is challenging since sites with access to water, and fibre are difficult to
-25%
WCPM JKPL TNPL find.
Note - FY18 production numbers not available as all annual reports are not out
Source: Company, Investec Securities estimates

WCPM’s growth has been hampered by lack of capacity WCPM cannot bid for NCLT’s assets
Revenue growth contributed by growth in Sales volume & Realisation (%)

70%  WCPM’s bid for Sirpur mill’s acquisition was rejected on technical grounds
60%
of eligibility under Section 29A of the Insolvency and Bankruptcy Code
50%
(IBC), as a group company had been classified as NPA.
40%
 Therefore, it may be difficult for WCPM to take advantage of opportunities
30%
arising from distress in the industry.
20%

10%

0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
-10%

-20%
Sales Volume growth Realisation growth

Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates

Page 112 | 06 August 2018 | West Coast Paper Mills

Past investment decisions are a cause for concern
The Company has made some poor investments in the past, where it incurred substantial losses

Equity Loans &

Year of
Investment in Investment Advances Year of sale/ write off Remarks
Investment
(Rs. mn) (Rs. mn)

Out of total Rs.1,045.2 mn invested, only

Shree Rama Newsprints 454.1 591.1 FY04 Stake sale in FY16
Rs 7.1 mn was recovered on sale.

WCPM sold partial investments in FY06

and wrote off balance. However, it
Speciality Coatings & Partial stake sale &
20.5 73.6 FY97 continued to provide deposits to the
Lamination balance written off in FY06
company till FY16. In FY16, company wrote
down the deposits entirely.

Increased
The company had written down
investment from 0.2
Fort Gloster Industries 40.3 70.8 Written off in FY04 investments in 2004. However, it booked
mn to 40 mn in
losses on advances given in FY08
FY01

Company wrote down investment by 4.8 mn

Jayashree chemicals 9.5 0.0 Prior to 1998 Partial write off in FY16
in FY16.

Wescomm suffered losses and became

Wescomm International FZE 4.0 0.0 FY02 Written off in FY03
unviable.

WCPM could not get the environmental

Bharat Sugar Mills 0.5 4.0 FY03 Stake sale in FY06 clearance from state government for setting
up a sugar mill project. Thus, it disposed off
the project.
Note: The Company Auditors have given qualified opinion in the past in relation to non-provision of these losses, and WCPM booked losses in later years.

Page 113 | 06 August 2018 | West Coast Paper Mills

Valuation
 The paper sector in India has come through challenging times, with a reasonable proportion of the sector entering bankruptcy. Factors contributing to the stress include 1)
overleverage 2) lack of raw material security and 3) competition from imports as tariffs were lowered over the years as part of free trade treaty with ASEAN countries.
However, the remaining companies have regained health, market share and are operating at high profitability.

 WCPM is one of the top paper companies in India, and has established a good brand, and a solid distribution network. It is trading at 9.5x FY18 P/E, with solid FCF
generation capability - WCPM generated ~Rs. 1,872 mn FCF in FY18, a yield of 7.9% on Enterprise Value.

 From a valuation perspective, the stock is inarguably attractive. However, we are cautious owing to WCPM’s propensity of unrelated diversification, and a relatively patchy
track record of past acquisitions. Given less comfort around WCPM’s unrelated past diversification, we value WCPM at a modest discount to our valuation for JKPL, and
TNPL – we value West Coast at 8X FY20E EPS of Rs 41.8.

Price Net EPS P/E FCF

Market Cap EV EV/
Indian Companies (In INR) YTD Debt/
04/08/2018 (Rs. mn) (Rs. mn) EBITDA 2018 2019E 2020E 2018 2019E 2020E Yield
EBITDA
JK Paper 151.3 9.0% 26,959.3 37,193.7 6.1 1.7 15.3 20.8 22.2 9.9 7.3 6.8 12.6%
West Coast Paper Mills 320.6 1.8% 21,172.0 23,634.7 6.5 0.7 33.8 36.6 41.8 9.5 8.8 7.7 7.9%
Tamil Nadu Newsprint & Papers 296.8 -33.9% 20,538.2 46,219.9 11.4 6.4 -6.1 30.2 48.4 0.0 9.8 6.1 11.6%
IP APPM 393.6 24.2% 15,651.5 17,146.4 7.7 0.7 23.1 25.5 28.3 17.0 15.4 13.9 10.7%
Average 7.9 2.3 9.1 10.3 8.6

Price Net EPS P/E FCF

Market Cap EV EV/
Global Players (In USD) YTD Debt/
04/08/2018 (USD mn) (USD mn) EBITDA 2018 2019E 2020E 2018 2019E 2020E Yield
EBITDA
International Paper 52.6 -12.1% 21,486.5 31,235.5 8.3 2.6 3.5 5.1 5.7 15.2 10.4 9.2 1.3%
Nine Dragons 1.3 -22.7% 5,919.4 8,781.7 7.7 2.5 0.1 0.2 0.2 10.4 6.5 6.7 0.1%
Mondi PLC 2,906.9 15.7% 14,079.9 15,588.4 9.5 0.9 168.9 194.3 204.8 17.2 15.0 14.2 3.2%
Average 8.5 2.0 14.3 10.6 10.0
Source: Company, Bloomberg, Investec Securities estimates

Page 114 | 06 August 2018 | West Coast Paper Mills

Valuation
Historical P/E Ratio [12 month forward] Relative P/E Ratio [12 month forward]
P/E (x) Stock Price (Rs.) 1.4 Relative P/E (X)
330.00
20.0
1.2
280.00
1.0
15.0
230.00
0.8
6.7
10.0 180.00 0.6
7.2 0.4
5.4
0.3 0.3
130.00 0.4
5.0
0.2
80.00

0.0
0.0 30.00 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18
Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18
Relative P/E Average Relative P/E
PE Average PE Share Price

Source: Company, BSE, Investec Securities estimates Source: Company, BSE, Bloomberg, Investec Securities estimates

Historical EV/ EBITDA [TTM] Historical P/B Ratio

11.0 EV/EBITDA (x) P/B (x)

10.0 2.9

9.0
2.4
8.0

7.0 1.9
6.2
6.0
1.6 1.5
5.2
4.8 1.4
5.0

4.0 0.8
0.9
3.0

2.0 0.4
Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18

EV/EBITDA Average EV/EBITDA P/B Average P/B

Source: Company, BSE, Investec Securities estimates Source: Company, BSE, Investec Securities estimates

Page 115 | 06 August 2018 | West Coast Paper Mills

Valuation
Historical Price/Sales Net Debt\EBITDA
1.1 P/S (x) 10.0 Net Debt/EBITDA (X)

1.0 9.0
0.9 8.0
0.8
7.0
0.7
0.54 6.0
0.6 0.52
0.46 5.0
0.5
4.0
0.4
3.0
0.3

0.2 2.0

0.1 1.0
Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17
0.0
P/S Average P/S FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19EFY20E

Source: Company, BSE, Investec Securities estimates Source: Company, Investec Securities estimates

Net Debt\Equity
2.5 Net Debt/Equity (X)

2.0

1.5

1.0

0.5

0.0
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19EFY20E

Source: Company, Investec Securities estimates

Page 116 | 06 August 2018 | West Coast Paper Mills

Valuation
Du Pont

Du Pont FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
EBIT Margin (%) 11.8% 10.0% 7.9% 14.3% 16.7% 17.5% 15.0% 14.0% 6.7% 9.4% 5.6% 7.5% 8.4% 13.0% 15.5% 17.2% 18.2%
Asset Turnover (x) 1.8X 1.7X 2.1X 2.0X 0.7X 0.4X 0.3X 0.6X 0.9X 1.1X 1.2X 1.5X 1.5X 1.5X 1.4X 1.4X 1.4X
Interest Burden (x) 0.9X 0.8X 0.8X 0.9X 1.0X 0.9X 0.9X 0.6X 0.2X 0.5X 0.2X 0.5X 0.5X 0.8X 0.8X 0.9X 0.9X
Tax Burden (x) 0.7X 0.8X 1.0X 0.9X 0.9X 0.9X 0.7X 1.0X 1.8X 0.9X 0.5X 0.9X 0.8X 0.7X 1.0X 0.8X 0.8X
Equity Multiplier (x) 1.6X 1.6X 1.4X 1.2X 2.0X 3.1X 3.1X 2.9X 2.4X 2.2X 2.2X 1.8X 2.2X 1.8X 1.4X 1.3X 1.1X
ROAE 21.7% 18.6% 17.7% 28.6% 20.4% 15.9% 9.1% 13.5% 5.1% 9.7% 1.1% 8.8% 10.2% 20.1% 26.6% 22.9% 21.2%

Source: Company, Investec Securities estimates

Page 117 | 06 August 2018 | West Coast Paper Mills

Company Overview
West Coast Paper Mills is one of the largest and oldest paper and board manufacturing company located in Karnataka.

WCPM has 320,000 tons of paper and board manufacturing capacity with fully integrated pulping capacity of 725 tonnes per day and captive power of 74.8 MW capacity and
adequate water from River Kali. It started in 1955 with capacity of 18,000 TPA backed by fibre security from government. However, government stopped supplying bamboo and
thus, the company was forced to start farm forestry initiatives and depend on government auctions. It has managed to source its 63% fibre requirement in FY18 from farm
forestry and domestic auctions. WCPM started importing wood chips in FY13 when imported prices were favorable vs domestic wood prices. As the scenario reverses, the
continuous efforts are being made to reduce dependence from imported wood chips.

The mill has successfully achieved one of the highest EBITDA margins in paper industry in FY18 due to its focus on improving cost efficiencies and higher realizations from its
strong distribution network. WCPM also has presence in cable business.

WCPM has acquired multiple businesses in the past, however, it has not achieved much success in its acquisition ventures.

Currently, it is facing capacity constraint as it runs on full capacity. It is on the lookout for growth opportunities both organically and inorganically. The company is capable of
expanding on back of a solid balance sheet, and rich free cash flows. However, there are some concerns about future sourcing of wood as eucalyptus plantations in Karnataka
have been banned.

As per our channel checks, its products are of good quality and the company also has room for price increases vs other players.

Page 118 | 06 August 2018 | West Coast Paper Mills

Timeline
2010 : Expansion program to increase capacity
2001 : Installed Jelly filled telephone cables
1955 : West Coast paper Mills was from 1,80,000 TPA to 320,000 TPA at Rs 1450
(JFTC) of 15,42,000 Ckm and expanded optical
established and government agreed to crs.
fibre cables capacity to 83,500 Kms.
provide bamboo for 30 years at 2010 : Installed 725 TPD fiber line replacing old
2001 : Attained 90% sufficiency in power.
concessional rate. Pulp line.
2002 : Installed 100 TPD duplex board.
1959 : Set up 18,000 TPA paper capacity 2010 : Thermal Capacity enhanced.
1961 : Initiated Captive plantations. 2003 : Capacity reached to 163,750 MTPA via
2011 : Redeemed both Preference shares &
rebuilding and adding duplex board capacity.
1974 : Further increased capacity to Debentures [Prepaid].
62,000 TPA. 2004 : Acquired 36.32% Shree Rama Newsprints
2015 : Received Qualified opinion for non
ltd [SRNL] for 45.41 Crs.
1989 : Government stopped supplying provision of diminution in investment value in
bamboo at concessional rate. 2005 : Commissioned 15.5 MW Turbine,
SRNL & Jayshree chemicals, corporate
replacing 11.84 MW furnace oil based generators
1995 : Installed 1050 KW wind power mill. deposits to SCLL.

1955 1996 2001 2007 2010 2016

1996 : Started Optical fiber cable business.

1996 : Installed 75 TPD duplex board machine 2006 : Sale and write off of SCLL investments. 2016 : Sold SRNL and booked Rs. 1038
1997 : Added 57,750 MTPA capacity of duplex mn loss
2007 : Production capacity increased to 1,80,000
board capacity. TPA. 2016 : Partial write off of Jayshree
1997 : Acquired Specialty Coating & Lamination Chemicals Investment and deposits to
2008 : Discontinued JFTC business due to low
Ltd [SCLL]; adding specialty products. SCLL
demand and unfavourable prices.
1998 : Commissioned 250 TPD bleach plant. 2018 : Invested in “West Coast
2008 : Raised 85 crores via GDRs & QIPs.
Opticable Ltd”.
1998/ 1999/2000 : Added power capacity. 2009 : Raised 855 crores via Preference shares, non
2018 : Announced Rs. 3300 mn
. convertible debentures and term loans.
investment towards debottlenecking.

Source: Company, Investec Securities estimates

Page 119 | 06 August 2018 | West Coast Paper Mills

Insider Ownership
# of shares as on Mkt value
Beneficial owner % of total shares outstanding
30th June 2018 (in '000s) (In Rs. Mn)

Bangur Family 8,664.2 2,767.8 13.1%

Veer Enterprises Ltd 10,574 3,377.9 16.0%

Shree Satyanarayan Investments Company Ltd 10,313 3,294.5 15.6%

Orbit Udyog Pvt Ltd 2,385 761.8 3.6%

Saumya Trade And Fiscal Services Pvt Ltd 2,071 661.7 3.1%

The Diamond Company Ltd 1,953 623.9 3.0%

Gold Mohore Investment Co Ltd 648 206.9 1.0%

Kilkotagiri and Thirumbadi Plantations Ltd 474 151.5 0.7%

Mothola Company Ltd. 78 24.8 0.1%

Others 41.7 13.3 0.1%

Total 37,202 11,884.1 56.3%

Source: Company, Investec Securities estimates

Page 120 | 06 August 2018 | West Coast Paper Mills

Institutional Ownership
# of shares as on
Mkt value
Beneficial owner 30th June 2018 % of total shares outstanding
(In Rs. Mn)
(in '000s)

Reliance Capital Trustee Co. Ltd 4,052 1,294.4 6.1%

L&T Mutual fund Trustee Ltd 1,069 341.5 1.6%

General Insurance Corp. of India 925 295.5 1.4%

Sundaram Mutual Fund 841 268.7 1.3%

Dimensional Fund Advisors LP 378 120.8 0.6%

APG Asset Management NV 168 53.7 0.3%

Acadian Asset Management LLC 152 48.6 0.2%

Cornerstone Advisors, Inc. (Washington) 74 23.6 0.1%

FIAM LLC 64 20.4 0.1%

TT International 32 10.2 0.0%

Others 3,694 1,180.0 5.6%

Total 11,449 3,657.3 17.3%

Source: Company, Investec Securities estimates

Page 121 | 06 August 2018 | West Coast Paper Mills

Management Team
Director Joining Yr Affiliation Brief profile

 He serves in Executive positions at Mothola Co. Ltd., Jayshree Chemicals Ltd., Fort Gloster
Chairman and Industries Ltd.
Shree Kumar Bangur 2003
Managing Director  He was also President at Indian Paper Manufacturers Association
 Qualification: Graduate from Calcutta University
 Extensive history of positions in West Coast Paper Mills and has been the Chief Financial
Rajendra Jain 2015 Whole time Director Officer of West Coast Paper Mills Limited since December 1, 2015
 ‘Chairman Award of exceptional Contributor’ from KM Birla
 Qualification: B.Com, CA, CS

B H Rathi 1979 President Technical  Has held various positions working his way up to his current leadership position
 Qualification: Laxminarayan Institute of Technology B.Tech (Chemical Engineering)
SVP Planning  Mr. B. K. Bhuyan has been Senior Vice President of Planning Development & Projects at
B K Bhuyan 2008 Development and West Coast Paper Mills Limited since December 13, 2016. Prior to that, Mr. Bhuyan served
Projects as an Senior Vice President of Operations at West Coast Paper Mills Ltd.

 Has previously been VP at Sirpur Paper Mills Ltd., and VP Corporate Finance RSWM Ltd.
VP Finance and Has also held position as VP Operations at Emami, and GM Finance & Accounts, Bhiwani
Vimal Arora 2014
Accounts Textile Mills, Grasim Industries Ltd.
 Qualification : IIM, Calcutta, BLP, ICAI (CA)
 Has previously been worked with GEI Industrial Systems Ltd., and was SVP (Works) Birla
Raghu Nair 2015 VP Works Ericsson Optical Ltd.
 Qualification: MSc (Industrial Production), IGNOU Diploma in Management, B.E
(Mechanical)
 Acting in capacity of CEO for the Telecom Cable division of West Coast Paper Mills Ltd
CEO Telecom Cable (West Coast Optilinks) since Jan 2017
Anil Tanwani 2017  He has held leadership and executive positions in various Optical Fibre Companies like
Division
Sterlite Technologies Ltd. and Sudarshan Telecom (now West Coast Optilinks)
 Qualification: B.E
Source: Company, Investec Securities estimates

Page 122 | 06 August 2018 | West Coast Paper Mills

Board of Directors
Director Joining Yr Affiliation Brief profile

Chairman and Managing

Shree Kumar Bangur 2003  See profile in prior section
Director

 Acting in executive positions in many public companies including Amrit-Villa Investments

Ltd., Shree Satyanarayan Investments Company Ltd., and Gloster Cables Ltd.. He is also
Saurabh Bangur 2004 Director, Vice Chairman the President of the Indian Paper Manufacturer’s Association (IPMA)
 Member of Stakeholder relationship committee , member of CSR committee, chairman of
Finance & Corporate affairs committee
 Qualification: (not accessible)
 Mrs. Shashi Devi Bangur has served as Chairman and Managing Director of The West Coast
Paper Mills Ltd. until Sep 2015. She serves as a Non-Executive Director of West Coast Paper
Shashi Bangur 1994 Director Mills Ltd and Kil Kotagiri Tea & Coffee Estates.
 Chairman of Stakeholder relationship committee
 Qualification: (not accessible)
 He is a well known industrialist, and a Director for various companies including Harshadray
Pvt. Ltd., TUV India Ltd., Kaira Can Company Ltd., Alkyl Amines Chemicals Ltd., Providian
Premal N Kapadia 1992 Director Global Solutions Pvt. Ltd., Silicon Interfaces Pvt. Ltd., Sujata Resources Pvt Ltd., Puma
Properties Limited and Thyssenkrupp Industries India Pvt. Ltd.
 Chairman of Audit Committee, member of Nomination and Remuneration Committee
 Qualification: (not accessible)
 He is a Retd. LT. Gen and has served as SVP in JP Group and has had positions of interest
in Prasar Bharati and International Broadcaster (Doordarshan and AIR)
Utpal Bhattacharyya 2009 Director  Member of Audit Committee, member of Nomination and Remuneration Committee
 Qualification: B.Sc (Hons) B.Tech (Hons) M.Sc (Defense Studies), M.Sc (Management
Studies)
 A well known industrialist who has served in executive capacities of many organizations
like Plastics Processors of India, and Supreme Petrochem Limited. He has a wide
Mahaveer Prasad Taparia 2010 Director experience in business management, marketing operations and actively involved in various
industry forums.
 Chairman of Nomination and Remuneration Committee, member of CSR committee
 Qualification: B.A

Page 123 | 06 August 2018 | West Coast Paper Mills

Director Joining Yr Affiliation Brief profile

 Mr. Amitav Kothari serves in various executive capacities in Kothari & Company, Kanoria
Chemicals & Industries Ltd., Maharaja Shree Umaid Mills Ltd., National Insurance Company
Ltd., South Eastern Coal Fields Ltd., LICI, Allahabad Bank, Rajasthan Spinning & Weaving
Amitav Kothari 2016 Director Mills Ltd.
 Member of Audit Committee
 Qualification: M.Com, LLB., FICA, FCA and Life Member of the Indian Council of Arbitration,
Fellow of British Institute of Management (U.K), and ICAI Panel
 Extensive experience in West Coast Paper Mills and has been the Chief Financial Officer of
West Coast Paper Mills Limited since December 1, 2015
CFO and Executive  Multiple key skill sets in Strategic Management and Corporate Affairs
Rajendra Jain 2015  ‘Chairman Award of exceptional Contributor’ from KM Birla
Director
 Member of Audit Committee, Member of Stakeholder relationship committee, member of
Finance & Corporate affairs committee
 Qualification: B.Com, CA, CS
 Expertise and wide experience in international commodity trading & terminal markets such
as London Metal Exchange. Acts as a Director of Sudarshan Investment & Export Co. Private
Sudarshan Somani 2017 Additional Director Ltd., Satyanarayan Traders & Investors Private Ltd., Amigo Mercantile Private Ltd and Rama
Newsprint & Papers Ltd. and others
 Member of the Audit Committee and Remuneration Committee
 Qualification: (not accessible)
 Mr. Krishna Kumar Karwa serves as the Chief Executive Officer and Managing Director at
Emkay Global Ltd. which he co-founded in 1995. He has 17 years experience in the stock
Krishna Kumar Karwa 2009 Director market across research, dealing and execution with special focus on the ‘cash’ segment of
the capital markets. He has been a Non-Executive Independent Director at West Coast
Paper Mills Ltd. since October 2009.
 Qualification: CA
Source: Company, Investec Securities estimates

Page 124 | 06 August 2018 | West Coast Paper Mills

Financial Models – Quarterly Income Statement
Quarterly Income Statement Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18

Revenues 3,930.4 4,115.0 4,394.2 4,560.8 4,092.2 4,456.9 4,394.5 4,749.7 3,865.2 4,215.3 4,085.8 4,935.7
% YoY -0.2% -4.9% 4.1% 14.0% 4.1% 8.3% 0.0% 4.1% -5.5% -5.4% -7.0% 3.9%
EBITDA 641.4 559.5 646.6 661.5 727.1 797.1 887.4 966.9 826.8 833.5 730.5 1,244.5
% of sales 16.3% 13.6% 14.7% 14.5% 17.8% 17.9% 20.2% 20.4% 21.4% 19.8% 17.9% 25.2%
Depreciation 273.9 286.3 281.3 275.5 270.9 274.0 274.5 288.3 262.0 280.1 286.8 333.3
Operating Profit 367.4 273.2 365.4 386.0 456.2 523.1 612.9 678.6 564.8 553.4 443.6 911.2
% of sales 9.3% 6.6% 8.3% 8.5% 11.1% 11.7% 13.9% 14.3% 14.6% 13.1% 10.9% 18.5%

Interest expenses 169.9 181.1 168.7 137.2 190.3 130.4 133.0 62.0 79.8 116.1 53.2 178.7
Other income 4.0 5.3 0.7 -1.8 5.2 1.0 0.4 17.2 30.9 7.5 87.7 54.1
Exceptions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
PBT 201.5 97.5 197.4 247.0 271.1 393.7 480.3 633.8 515.9 444.8 478.2 786.7
% to net sales 5.1% 2.4% 4.5% 5.4% 6.6% 8.8% 10.9% 13.3% 13.3% 10.6% 11.7% 15.9%

Tax -94.9 68.0 46.9 155.0 121.8 139.3 106.2 126.5 -21.2 -33.0 48.7 -1.1
Eff tax rate (%) 28.4% 69.7% 23.4% 62.8% 44.9% 35.4% 22.1% 20.0% -4.1% -7.4% 10.2% -0.1%
PAT -239.1 29.6 153.2 91.7 149.3 254.4 374.1 507.3 537.1 477.9 429.5 787.8
% to net sales -6.1% 0.7% 3.5% 2.0% 3.6% 5.7% 8.5% 10.7% 13.9% 11.3% 10.5% 16.0%
Source: Company, Investec Securities estimates

Page 125 | 06 August 2018 | West Coast Paper Mills

Financial Models – Annual Income Statement
Income Statement FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Revenues 6,197.5 6,239.1 10,709.2 13,051.8 14,546.4 15,623.2 16,483.7 17,000.4 17,693.4 17,102.0 19,708.9 20,705.7
% YoY 6.1% 0.7% 71.6% 21.9% 11.5% 7.4% 5.5% 3.1% 4.1% -3.3% 15.2% 5.1%
EBITDA 1,202.2 1,110.8 2,396.6 2,262.2 2,686.1 2,076.7 2,425.5 2,495.3 3,380.6 3,628.6 4,697.3 5,125.2
% of sales 19% 18% 22% 17% 18% 13% 15% 14.7% 19.1% 21.2% 23.8% 24.8%
Depreciation 199.0 237.7 961.1 1,431.5 1,363.5 1,271.9 1,222.0 1,143.6 1,109.8 1,162.3 1,300.6 1,350.5
Operating Profit 1,003.2 873.1 1,435.5 830.7 1,322.6 804.8 1,203.5 1,351.7 2,270.8 2,466.3 3,396.7 3,774.7
% of sales 16% 14% 13% 6% 9% 5% 7% 8.0% 12.8% 14.4% 17.2% 18.2%

Interest expense 77.4 121.6 560.6 715.0 725.7 732.3 670.9 758.1 515.7 423.7 295.5 238.7
Other income 78.8 63.2 62.9 41.3 48.1 67.0 30.7 76.7 23.7 182.9 0.0 0.0
Exceptions 0.0 0.0 0.0 -622.0 -399.4 0.0 -516.0 -487.4 0.0 0.0 0.0 0.0
PBT 1,004.6 814.7 937.8 -465.0 245.6 139.5 47.3 183.0 1,778.8 2,225.6 3,101.1 3,536.0
% to net sales 16% 13% 9% -4% 2% 1% 0% 1.1% 10.1% 13.0% 15.7% 17.1%

Tax 99.2 267.7 30.1 -131.4 64.3 73.2 36.2 142.6 493.8 -6.7 682.3 777.9
Eff tax rate (%) 10% 33% 3% 28% 26% 52% 76% 77.9% 27.8% -0.3% 22.0% 22.0%
PAT 905.4 547.0 907.8 -333.6 181.2 66.3 11.2 40.3 1,285.0 2,232.2 2,418.9 2,758.0
% to net sales 15% 9% 8% -3% 1% 0% 0% 0.2% 7.3% 13.1% 12.3% 13.3%

EPS [Fully Diluted] 15.7 8.8 13.3 4.4 8.9 1.0 0.2 -0.1 19.5 33.8 36.6 41.8
% YoY -4.1% -44.1% 51.5% -66.8% 100.9% -88.7% -83.0% -141.2% NA 73.7% 8.4% 14.0%

DPS 2.0 2.0 2.0 0.2 1.0 1.0 0.0 1.0 2.5 4.0 4.0 4.0
% YoY -33.3% 0.0% 0.0% -90.0% 400.0% 0.0% -100.0% 100.0% 150.0% 60.0% 0.0% 0.0%
Source: Company, Investec Securities estimates

Page 126 | 06 August 2018 | West Coast Paper Mills

Financial Models – Balance Sheet
Balance Sheet FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Net worth 5,677.8 6,013.2 6,704.6 5,695.1 5,977.6 5,966.6 5,977.7 5,165.7 6,391.5 8,390.1 10,544.8 13,038.7
Equity capital 770.8 775.3 775.3 125.3 132.1 132.1 132.1 132.1 132.1 132.1 132.1 132.1
Reserves 4,907.0 5,237.8 5,929.3 5,569.8 5,845.5 5,834.5 5,845.6 5,033.6 6,259.4 8,258.0 10,412.7 12,906.6
Debt 11,736.5 12,347.1 12,124.6 12,636.6 10,806.5 10,660.8 9,104.3 7,438.9 4,998.6 2,544.8 2,250.4 241.9
Deferred tax liab 400.2 664.9 685.9 554.5 615.2 687.1 723.3 856.8 1,350.5 141.5 141.5 141.5
Others 0.0 0.0 0.0 301.5 346.0 335.8 333.5 900.8 987.3 1,432.9 1,432.9 1,432.9
Total 17,814.5 19,025.2 19,515.1 19,187.7 17,745.2 17,650.3 16,138.9 14,362.2 13,727.9 12,509.4 14,369.7 14,855.1

Capitalised assets 2,068.2 8,056.3 15,283.2 14,567.9 13,176.7 12,427.4 11,466.9 11,240.9 10,242.5 10,516.4 11,982.5 11,628.6
Capital WIP 11,200.5 7,469.0 0.9 45.7 26.4 49.2 23.0 33.5 60.1 32.2 32.2 32.2
Investments 460.5 467.1 467.1 467.1 467.1 467.1 467.1 8.3 8.3 10.2 10.2 10.2
Cash 2,844.3 1,165.9 757.9 141.3 57.8 91.3 131.3 126.2 138.7 71.8 70.0 757.7
Non Current Assets 1,081.1 1,610.1 2,545.0 3,445.4 3,496.2 3,504.0 3,406.4 2,319.4 2,424.0 1,592.7 1,988.8 2,140.2
Others 159.9 257.0 461.2 520.5 520.6 1,111.2 644.0 633.9 854.3 286.0 286.0 286.0
Total 17,814.5 19,025.4 19,515.3 19,187.8 17,744.9 17,650.3 16,138.9 14,362.2 13,727.9 12,509.4 14,369.7 14,855.1

Balance Sheet Key Ratios FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Net Debt 8,431.7 10,714.1 10,899.6 12,028.2 10,281.6 10,102.4 8,505.8 7,304.4 4,851.6 2,462.7 2,170.2 -526.0

Net Debt/Equity 1.5X 1.8X 1.6X 2.1X 1.7X 1.7X 1.4X 1.4X 0.8X 0.3X 0.2X 0.0X
Interest Coverage Ratio 13.0X 7.2X 2.6X 1.2X 1.8X 1.1X 1.8X 1.8X 4.4X 5.8X 11.5X 15.8X
Working Capital Ratios
Inventory Turns 84.6X 104.8X 68.5X 87.6X 75.5X 114.0X 107.0X 80.5X 58.3X 73.2X 73.2X 73.2X
Receivable Turns 25.6X 20.0X 24.9X 20.4X 20.7X 23.6X 27.7X 25.3X 26.5X 25.4X 25.4X 25.4X
Payable Turns 107.2X 105.3X 58.3X 27.9X 26.6X 60.3X 55.2X 42.8X 30.5X 43.1X 43.1X 43.1X
Other Turns 60.7X 74.7X 51.7X 16.3X 18.2X 4.6X -4.0X -13.3X -4.2X -21.5X -18.6X -17.7X
Net Working Capital days 63.7X 94.2X 86.7X 96.4X 87.7X 81.9X 75.4X 49.8X 50.0X 34.0X 36.8X 37.7X
Fixed Asset Turns 781.5X 908.3X 520.9X 408.7X 331.3X 291.5X 254.4X 241.3X 211.3X 496.3X 481.9X 476.3X
Source: Company, Investec Securities estimates

Page 127 | 06 August 2018 | West Coast Paper Mills

Financial Models – Cash Flow
Cash Flow FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Profit Before Tax & Exceptional items 1,004.6 814.7 930.7 -467.0 245.5 139.5 47.3 138.0 1,778.8 2,225.6 3,101.1 3,536.0
Adjustments 40.4 129.5 695.6 1,995.1 2,450.3 1,925.7 1,876.5 2,304.2 1,403.3 997.5 913.9 811.3
Changes in Working Capital 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Cash flow from Operating Activities 646.0 349.0 695.4 1,115.6 2,626.8 1,495.0 2,567.7 2,442.2 3,182.1 3,223.1 4,015.1 4,347.3

(Purchase)/ Sale of Fixed Assets -8,166.8 -2,497.3 -670.3 -1,396.4 -355.5 -611.8 -229.1 -270.5 -302.1 -1,458.3 -2,766.7 -996.7
Purchase / Sale of Investment 90.0 -6.7 49.1 0.0 538.2 0.0 0.0 0.0 0.0
Investment Income 40.5 10.6 0.5 21.0 37.2 56.3 6.1 68.4 8.2 4.7 0.0 0.0
Other Investment Activities 2.5 0.0 0.0 -94.6 64.0 0.0 0.0
Cash flow from Investment Activities -8,036.3 -2,490.9 -669.7 -1,375.4 -318.2 -506.4 -223.0 336.1 -388.5 -1,389.7 -2,766.7 -996.7

Issue/ (Repayment) of Borrowings 7,672.8 610.6 -222.5 1,685.1 -1,830.3 -145.5 -1,556.5 -564.8 -3,345.6 -1,332.1 -294.4 -2,008.5
Proceeds/(Buyback) from Issue of Eq
900.0 0.0 -1,823.1 179.2 0.0 0.0 0.0 0.0 0.0
Shares
Interest Paid -725.7 -732.3 -670.9 -758.1 -515.7 -408.5 -295.5 -238.7
Dividend Paid -201.4 -147.2 -211.5 -218.7 -15.4 -77.3 -77.3 0.0 -79.5 -198.7 -264.2 -264.2
Cash from financing 8,371.5 463.5 -434.0 -356.8 -2,392.2 -955.0 -2,304.7 -1,322.9 -3,940.8 -1,939.2 -854.1 -2,511.4

Change of cash 981.1 -1,678.4 -408.0 -616.6 -83.5 33.6 40.0 1,455.4 -1,147.2 -105.9 394.3 839.2

FCFF -7,390.3 -2,141.9 25.9 -259.9 2,308.7 988.6 2,344.7 1,317.8 3,953.3 1,872.3 852.3 3,199.1
FCFE 295.7 -1,531.2 -247.7 231.1 441.1 786.8 782.1 146.3 727.5 540.3 557.9 1,190.6
Source: Company, Investec Securities estimates

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Summary Financials (INRm) Year end: 31 March

Income Statement 2016 2017 2018 2019E 2020E Cash Flow 2016 2017 2018 2019E 2020E Balance Sheet 2016 2017 2018 2019E 2020E
Revenue 17,000.4 17,693.4 17,102.0 19,708.9 20,705.7 Operating profit 1,351.7 2,270.8 2,466.3 3,396.7 3,774.7 Property plant and equipment 11,274.4 10,302.7 10,548.7 12,014.7 11,660.8
EBITDA 2,495.3 3,380.6 3,628.6 4,697.3 5,125.2 Depreciation & amortisation (1,351.7) (2,270.8) (2,466.3) (3,396.7) (3,774.7) Intangible assets 0.0 0.0 0.0 0.0 0.0
Depreciation and amortisation 1,351.7 2,270.8 2,466.3 3,396.7 3,774.7 Other cash and non-cash movements 1,898.1 2,867.4 3,337.7 4,401.8 4,886.5 Investments and other non current assets 642.2 862.5 296.3 296.3 296.3
Operating profit 1,351.7 2,270.8 2,466.3 3,396.7 3,774.7 Change in working capital (1,460.5) 1,159.7 38.8 (396.1) (151.5) Cash and equivalents 126.2 138.7 71.8 70.0 757.7
Other income 76.7 23.7 182.9 0.0 0.0 Operating cash flow 437.6 4,027.1 3,376.3 4,005.7 4,735.0 Other current assets 333.2 680.3 367.4 367.4 367.4
Net interest 758.1 515.7 423.7 295.5 238.7 Interest 674.5 543.3 408.5 295.5 238.7 Total assets 17,306.8 16,094.0 15,902.4 18,070.6 18,673.6
Share-based-payments 0.0 0.0 0.0 0.0 0.0 Tax paid (62.0) (220.4) (518.2) (682.3) (777.9) Total debt 7,438.9 4,998.6 2,544.8 2,250.4 241.9
PBT (normalised) 670.3 1,778.8 2,225.6 3,101.1 3,536.0 Dividends from associates and JVs (68.4) (8.2) (4.7) 0.0 0.0 Preference shares 0.0 0.0 0.0 0.0 0.0
Impairment of acquired intangibles 0.0 0.0 0.0 0.0 0.0 Cash flow from operations 981.7 4,341.8 3,261.8 3,618.9 4,195.8 Other long term liabilities 1,716.7 2,279.4 1,537.4 1,537.4 1,537.4
Non-recurring items/exceptionals 670.3 1,778.8 2,225.6 3,101.1 3,536.0 Maintenance capex (270.5) (302.1) (1,458.3) (2,766.7) (996.7) Provisions & other current liabilities 827.8 808.5 1,269.2 1,269.2 1,269.2
PBT (reported) 670.3 1,778.8 2,225.6 3,101.1 3,536.0 Free cash flow 711.1 4,039.7 1,803.5 852.3 3,199.1 Pension deficit and other adjustments 0.0 0.0 0.0 0.0 0.0
Taxation 142.6 493.8 (6.7) 682.3 777.9 Expansionary capex 0.0 0.0 0.0 0.0 0.0 Total liabilities 12,141.1 9,702.5 7,512.2 7,525.7 5,634.9
Minorities & preference dividends 0.0 0.0 0.0 0.0 0.0 Exceptionals & discontinued operations 0.0 0.0 0.0 0.0 0.0 Net assets 29,447.9 25,796.5 23,414.6 25,596.3 24,308.6
Discontinued/assets held for sale 0.0 0.0 0.0 0.0 0.0 Other financials (151.4) (507.6) (403.7) (295.5) (238.7) Shareholder's equity 5,165.7 6,391.5 8,390.1 10,544.8 13,038.7
Net Income (normalised) 484.3 1,285.0 2,232.2 2,418.9 2,758.0 Acquisitions 0.0 0.0 0.0 0.0 0.0 Minority interests 0.0 0.0 0.0 0.0 0.0
Attributable profit 40.3 1,285.0 2,232.2 2,418.9 2,758.0 Disposals 0.0 0.0 0.0 0.0 0.0 Total equity 5,165.7 6,391.5 8,390.1 10,544.8 13,038.7
EPS (reported) (0.1) 19.5 33.8 36.6 41.8 Net share issues 0.0 0.0 0.0 0.0 0.0 Net working capital 2,470.8 2,585.1 1,592.7 1,988.8 2,140.2
EPS (norm., cont.) – FD (INR) 7.3 19.5 33.8 36.6 41.8 Dividends paid 0.0 (79.5) (198.7) (264.2) (264.2) NAV per share (INR) 78.2 96.8 127.0 159.7 197.4
EPS (norm., cont., IAS19R adj.) – FD - - - - - Change in net cash 559.7 3,452.7 1,201.0 292.5 2,696.2
DPS (INR) 0.5 1.5 2.5 2.5 2.5 Net cash/(debt) 7,304.4 4,851.6 2,462.7 2,170.2 (526.0)
Average number of group shares - FD (m) 66.0 66.0 66.0 66.0 66.0 FCFPS - FD (INR) 20.0 59.9 28.3 12.9 48.4
Average number of group shares (m) 66.0 66.0 66.0 66.0 66.0
Total number of shares in issue (m) 66.0 66.0 66.0 66.0 66.0
Source: Company, Investec Securities estimates

Page 129 | 06 August 2018 | West Coast Paper Mills

 Disclosures
Third party research disclosures Research recommendations framework
This report has been produced by a non-member affiliate of Investec Securities (US) LLC and is being Investec Securities bases its investment ratings on a stock’s expected total return (ETR) over the next 12 months (with total return defined as the expected percentage change in price plus the
distributed as third-party research by Investec Securities (US) LLC in the United States. In the United projected dividend yield). Our rating bands take account of differences in costs of capital, risk premia and required rates of return in the various markets that we cover. Prior to 21st January 2013
States, this report is not intended for use by or distribution to entities that do not meet the definition of our rating system for European stocks was: Sell ETR <-10%, Hold ETR -10% to 10%, Buy ETR >10%. From 21st January 2013 any research produced will be on the new framework set out in
a Major US Institutional Investor, as defined under SEC Rule 15a-6, or an Institutional Investor, as the tables below. Prior to 11th March 2013, our rating system for South African stocks was: Sell ETR <10%, Hold ETR 10% to 20%, Buy ETR >20%. From 11th March 2013, any research
defined under FINRA rule 4512 (c), or for use by or distribution to any individuals who are citizens or produced on South African stocks will be on the new framework set out in the table below.
residents of the United States.
Investec Securities (US) LLC accepts responsibility for the issuance of this report when distributed in
Stock ratings for European/Hong Kong stocks Stock ratings for research produced by Investec Bank plc
the United States to entities who meet the definition of a US Major Institutional Investor or an Institutional Expected total return All stocks Corporate stocks
Investor. 12m performance Count % of total Count % of total
Buy greater than 10% 215 62% 85 40%
Hold 0% to 10% 107 31% 8 7%
Sell less than 0% 27 8% 0 0%
Source: Investec Securities estimates
Analyst certification
Each research analyst responsible for the content of this research report, in whole or in part, and who
is named herein, attests that the views expressed in this research report accurately reflect his or her
Stock ratings for Indian stocks Stock ratings for research produced by Investec Bank plc
personal views about the subject securities or issuers. Furthermore, no part of his or her compensation Expected total return All stocks Corporate stocks
was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by 12m performance Count % of total Count % of total
that research analyst in this research report.
Buy greater than 15% 78 64% 0 0%
Managing conflicts Hold 5% to 15% 28 23% 0 0%
Investec Securities (Investec) has investment banking relationships with a number of companies Sell less than 5% 16 13% 0 0%
covered by our Research department. In addition we may seek an investment banking relationship with Source: Investec Securities estimates
companies referred to in this research. As a result investors should be aware that the firm may have a
conflict of interest which could be considered to have the potential to affect the objectivity of this report. Stock ratings for African* stocks Stock ratings for research produced by Investec Securities Limited
Investors should consider this report as only a single factor in making their investment decision. The Expected total return All stocks Corporate stocks
subject company may have been given access to a pre-published version of this report (with
12m performance Count % of total Count % of total
recommendation and price target redacted) to verify factual information only.
Investec Securities research contains target prices and recommendations which are prepared on a 12 Buy greater than 15% 39 57% 6 15%
month time horizon, and therefore may not reflect the different circumstances, objectives and Hold 5% to 15% 20 29% 2 10%
investment time horizons of those who receive it. Investors should therefore independently evaluate Sell less than 5% 10 14% 1 10%
whether the investment(s) discussed is (are) appropriate for their specific needs. In addition, the Source: Investec Securities estimates
analysts named in this report may from time to time discuss with our clients, including Investec
salespersons and traders, or may discuss in this report, trading strategies that reference near term *For African countries excluding South Africa, ratings are based on the 12m implied US dollar expected total return (ETR). This is derived from the expected local currency (LCY) ETR by making
catalysts or events which they believe may have an impact in the shorter term on the market price of assumptions on the 12month forward exchange rates for the respective currencies. For South African stocks, ratings are based on the ETR in rand terms.
securities discussed in this report. These trading strategies may be directionally counter to the analyst's For European and Hong Kong stocks, within the Hold banding, an Add rating may be (optionally) applied if the analyst is positive on the stock and the ETR is greater than 5%; a Reduce rating
published target price and recommendation for such stocks. may be (optionally) applied if the analyst is negative on the stock and the ETR is less than 5%.
For price target bases and risks to the achievement of our price targets, please contact the Key Global Not rated (N/R) is applied to any stock where we have no formal rating and price target. Under Review (U/R) can be applied to an analyst’s rating, price target and/or forecasts for a limited time
Contacts for the relevant issuing offices of Investec Securities listed on the following page of this period and indicates that new information is available that has not yet been fully digested by the analyst. We regularly review ratings across our coverage universe as we seek to ensure price
research note. targets and ratings remain aligned. However, during periods of market, sector or stock volatility, we may allow minor deviations from our recommendation framework to persist on a temporary
basis to avoid a high frequency of rating changes arising from rapid share price movements.

Investec may act as a liquidity provider or as a systematic internaliser in the securities of the subject company/companies included in this report.
For full disclosures, including any company mentioned herein, please visit: http://researchpdf.investec.co.uk/Documents/WDisc.pdf
Our policy on managing actual or potential conflicts of interest in the United Kingdom can be found at: https://www.investec.co.uk/legal/uk/conflicts-of-interest.html
Our policy on managing actual or potential conflicts of interest in South Africa can be found at:http://www.investec.co.za/legal/sa/conflicts-of-interest.html

Page 130 | 06 August 2018 | West Coast Paper Mills

Investec Securities: Company disclosures
In the United Kingdom refers to Investec Securities a division of Investec Bank plc. JK Paper Tamil Nadu Newsprint & West Coast Paper Mills
Investec Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Papers
the Prudential Regulation Authority and is a member of the London Stock Exchange.
Registered in England No. 489604
Registered Office Address: Key:  Investec has received compensation from the company for investment banking services within the past 12 months, Investec expects to receive or
intends to seek compensation from the company for investment banking services in the next 6 months, Investec has been involved in managing or co-
30 Gresham Street London EC2V 7QP managing a primary share issue for the company in the past 12 months, Investec has been involved in managing or co-managing a secondary share issue
In Ireland refers to Investec Bank plc (Irish Branch) for the company in the past 12 months, Investec makes a market in the securities of the company, Investec holds/has held more than 1% of common
Investec Bank plc (Irish Branch) is authorised by the Prudential Regulation Authority in the United Kingdom and is regulated by equity securities in the company in the past 90 days,  Investec is broker and/or advisor and/or sponsor to the company, The company holds/has held
the Central Bank of Ireland for conduct of business rules. Registered in Ireland No. 904428 more than 5% of common equity securities in Investec in the past 90 days, The analyst (or connected persons) is a director or officer of the company,
Registered Office Address: The analyst (or connected persons) has a holding in the subject company, The analyst (or connected persons) has traded in the securities of the
The Harcourt Building, Harcourt Street, Dublin 2 company in the last 30 days.  Investec Australia Limited holds 1% or more of a derivative referenced to the securities of the company.  Investec holds a
In South Africa refers to Investec Bank Limited an authorised financial services provider and a member of the JSE Limited. net long position in excess of 0.5% of the total issues share capital in of the company.  Investec holds a net short position in excess of 0.5% of the total
issued share capital of the company.  The sales person has a holding in the subject company.
Registered in South Africa No. 1969/004763/06
Registered Office Address:
100 Grayston Drive, Sandown, Sandton, 2196, South Africa
In Australia refers to Investec Securities a division of Investec Australia Limited.
Investec Australia Limited is authorised and regulated by the Australian Securities & Investments Commission (Licence
Number 342737, ABN 77 140 381 184)
Registered Office Address:
Level 23, Chifley Tower, 2 Chifley Square, Sydney, NSW 2000
In Hong Kong refers to Investec Capital Asia Limited a Securities and Futures Commission licensed corporation (Central Entity
Number AFT069).
Registered Office Address:
Suite 3609, 36/F, Two International Finance Centre, 8 Finance Street, Central Hong Kong
In India refers to Investec Capital Services (India) Private Limited which is registered with the Securities and Exchange Board
of India, the Capital Market regulator in India as a research analyst, Registration number INH000000263.
Registered Office Address:
Unit no 607, 6th floor, The Capital, Plot no C-70, GBlock, Bandra Kurla Complex, Bandra East, Mumbai 400051
In Singapore refers to Investec Singapore Pte. Ltd. an exempt financial adviser which is regulated by the Monetary Authority of
Singapore as a capital markets services licence holder.
Registration No. 201634931E
Registered Office Address:
80 Raffles Place, #36-09, UOB Plaza, Singapore 048624
In the United States refers to Investec Securities (US) LLC.
Registered Office Address:
10 East 53rd Street, 22nd Floor, New York, NY 10022
Further details of Investec office locations, including postal addresses and telephone/fax contact details:
https://www.investec.com/en_gb/welcome-to-investec/contact-us.html

Key Global Contacts

United Kingdom South Africa
Andrew Fitchie Leon van Heerden
+44 (0)20 7597 5084 +27 11 286 7941
[email protected] [email protected]
Analyst(s) Specialist Sales
Bhakti Thacker Mukul Kochhar
+91 (22) 6136 7425 +91 (22) 6136 7431
[email protected] [email protected]

Page 131 | 06 August 2018 | West Coast Paper Mills

Recommendation history (for the last 3 years to previous day’s close)

For recommendation history on all covered stocks including any company mentioned herein, please visit: http://researchpdf.investec.co.uk/Documents/WDisc.pdf

JK Paper (JKPA.NS) – Rating Plotter as at 06 Aug 2018

220
200
180
160
140
120
100
80
60
40
20
0

Price Target
Buy Hold Sell Not Rated

Source: Investec Securities / FactSet

Tamil Nadu Newsprint & Papers (TNNP.BO) – Rating Plotter as at 06 Aug 2018

450

400

350

300

250

200

150

100

50

Price Target
Buy Hold Sell Not Rated

Source: Investec Securities / FactSet

Page 132 | 06 August 2018 | West Coast Paper Mills

West Coast Paper Mills (WCPM.NS) – Rating Plotter as at 06 Aug 2018

300

250

200

150

100

50

Price Target
Buy Hold Sell Not Rated

Source: Investec Securities / FactSet

Page 133 | 06 August 2018 | West Coast Paper Mills

Important Disclaimer – please read
For the purposes of this disclaimer, “Investec Securities” shall mean: (i) Investec Bank plc (“IBP”); (ii) Investec Bank plc (Irish Branch) (iii) Investec Bank Limited (“IBL”); (iv) Investec Australia Limited (“IAL”); (v) Investec Capital Asia Limited (“ICAL”), (vi) Investec Capital Services (India) Private Limited
and (vii) Investec Singapore Pte. Ltd (“ISPL”) and from time to time, in relation to any of the forgoing entities, the ultimate holding company of that entity, a subsidiary (or a subsidiary of a subsidiary) of that entity, a holding company of that entity or any other subsidiary of that holding company, and any
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