Company Overview

 

N R Agarwal Industries Ltd.(NRAIL) is one of the 1,213.8 prominent manufacturers of duplex boards (paper packaging), writing & printing (W&P) and newsprint (N/P) papers.

 

NRAIL is a pioneer in development, manufacturer of quality finished paper products by recycling of waste paper and marketing in domestic and international markets. Established in 1993, it was promoted by NRAIL Group and founded by Late Shri N R Agarwal and is headquartered in Mumbai-India. NRAIL has been consistently providing high quality Papers to Packaging Industries, News Papers and Business Stationery segments in different parts of the world. NRAIL had 4 manufacturing facilities in Vapi Gujarat, India till June 2014, 3 facilities manufacture Coated Duplex Boards and 1 manufactures Newsprint.

 

The company embarked on an expansion project to manufacture writing and printing papers with a capacity of 90,000 tonnes per annum at Sarigam, Gujarat at a cost of Rs. 3,300 millions. The said expansion project was completed in July 2014. after successful trials, the commercial production output of the new paper machine commenced on July 21, 2014.

 

The company has vast resources in terms of assets, technical expertise and technology, research and development, plants and state of the art machinery, well equipped laboratories, excellent infrastructure and utilities including water, own power generation (steam), steam generation, communication, D.M. Plants, effluent treatment plants, transportation etc. at all manufacturing locations. the group has excellent marketing network including highly effective sales team, end users, distributors, storage facility and fast delivery capabilities.

 

Industry Overview

The annual consumption of Indian paper industry is expected to grow at a CAGR of 10% from 20.37 million tons in FY 2018 to 25 million tons in FY 2020. However, it could be disrupted by impending challenges such as high cost of production, power cost, the presence of highly fragmented market, the existence of foreign competitors and obsolescence in the current technology.

Imports of paper has reached around 4 million tons in FY 2018 against 3 million tons in FY 2017, increasing at a CAGR of 18% in last six years and touching Rs. 13,937 Cr in the last financial year. The primary reason for rising imports is the cost of producing paper in India is higher than other countries due high cost of raw materials and other inputs and energy costs as well.

It is anticipated that the overall demand for paper to grow at a CAGR of 6.60%, which is likely to touch 18.50 million tons in FY 2019. Meanwhile, the demand of paper from Printing and Writing segment and Packaging Paper and Board segment is expected to grow at a CAGR of 4.20% and 8.90% respectively to reach 5.30 million tons and 9.7 million tons respectively in FY 2019.

Indian paper industry currently contributes around 4% (Refer Figure 5) to the global paper industry.

Financial Analysis

Years	2018	2017	2016	2015	2014
Net Profit Margin	7.36%	4.54%	2.02%	-4.61%	0.08%
EBITDA Margin	13.15%	13.28%	8.30%	4.98%	4.17%
ROCE	27.06%	25.81%	11.50%	4.71%	3.46%
ROE	41.13%	37.34%	18.95%	-43.85%	0.41%
Current Ratio	1.02	0.99	0.80	0.70	0.61
Interest Coverage	3.56	2.83	1.09	0.52	1.06
Debt to Equity	1.10	1.99	3.33	4.32	2.65

 

1. Over the past 5 years, the company has experienced remarkable sales growth of around 22.72% p.a. However, the increase in Net Profit over the past 5 years is almost 276% p.a., which shows that there has definitely been an improvement in cost management.
2. The EBITDA Margin has increased substantially from 4% to 13%. The ROE and ROCE have seen monumental growth over the past 5 years.
3. The debt to equity is almost 1, which is a healthy number as long as the interest coverage is high, which is the case here at almost 3.6, this proves that the company can easily pay its debt service payments.
4. The cash flow of NRAI is healthy, as the cash from operations has remained above the PAT and positive, even when there was a net loss.

(Rs. in Crores)

Years	2018	2017	2016	2015	2014
Cash from Operations	110.83	90.58	37.59	63.19	37.96
Net Profit	90.24	49.73	17.83	-33.43	0.45

 

5. The major cash flows in the past 5 years have been:

(Rs. in Crores)

Years	2018	2017	2016	2015	2014
Cash from Operating Activity	110.83	90.58	37.59	63.19	37.96
Cash from Investing Activity	-46.68	-13.96	-30.93	-62.60	-97.77
Fixed Assets Purchased	-49.20	-31.03	-33.55	-64.50	-99.54
Fixed Assets Sold	0.32	14.93	0.27	0.00	0.04
Interest Received	2.20	2.14	2.22	1.89	1.72
Cash from Financing Activity	-61.34	-77.54	-11.46	6.04	56.78
Operating Cash Flow to Sales	0.09	0.08	0.04	0.09	0.07

 

 

Future Outlook

Positive

1. NRAIL’s plant uses waste paper as raw material, procured from imports (52-54%) as well as the domestic market (46-48% in FY18). The waste paper pricing dynamics play an important role in NRAIL’s financials as cost of waste paper comprises ~70% of total raw material costs. In the near term, prices of waste paper internationally saw a downward trajectory post the ban on import of waste paper in China. The consequent lower raw material costs along with operational efficiency and higher realisations contributed to higher EBITDA margins of 13%, much above its historical average of 7-8%. This is likely to continue in the near future.
2. The Company has recently done a price increase in various products which will directly increase the bottom line impact

Negative

1. There is already a decline in demand for paper and board in some of the advanced countries such as North America, Japan, and Western Europe, and this is expected to continue.
2. The market shift from print to digital media can cause losses in the newsprint segment.
3. Currently, the promoters have approximately 73% of total shares, however, 100% of the promoter held shares are pledged. This can be an issue for the company in the future

Conclusion

The fundamentals of the company seem to be good. However, the industry in which this company is operating inherently has low margins, capital intensive, and raw material prices are cyclical in nature.Wood, which makes up about 30-35% of the raw material, is currently priced low, however these prices are expected to bounce back.Additionally, most of the peers of the company have much lower debt to equity than this company. Overall, smart invest like Dolly Khanna might have shown interest in this company in light of paper industry might do well in the next few years due to capacity reduction or shutdown of some paper manufactures in China because of pollution concerns.

CA.Binoy J.Kattadiyil