International prices of pulp remained low for quite some time but now they have started to rise. Merchants in the UK have increased the prices of uncoated paper by five to seven per cent. In 2017, the prices of international hardwood pulp rose from $200 per tonne to a staggering $690 per tonne. The prices of Kraft paper surged to 23 per cent. The reasons for the same were attributed to supply-side problems since the pulp mills in Indonesia and Brazil had lower production on account of environmental concerns.

The domestic demand for paper has been growing at around 8% per annum, mirroring the growth in GDP and making the country one of the fastest-growing paper markets in the world.Additionally,Indian paper industry is poised to grow and touch 25 million tonnes to 2019-20 from 2017-18 at the rate of 10% per annum, according to The Associated Chambers of Commerce and Industry of India (ASSOCHAM) recent paper. 

Despite the continued focus on digitisation, India’s demand for paper is expected to rise significantly over the coming years. Growing consumerism, modern retailing, increase in the number of school-going children in rural areas (continued government spending on education through the Sarva Shiksha Abhiyan) and the increasing use of documentation will keep demand for paper buoyant. In addition, the exponential growth of e-commerce in the country has opened up a new horizon and could contribute significantly to the demand where paper is being extensively used for packaging. The paper industry in India looks extremely positive as the demand for upstream market of paper products, like, tissue paper, tea bags, filter paper, light weight online coated paper, medical grade coated paper, etc., is growing up. 

Major issues confronting India’s pulp and paper industry are high cost of production caused by inadequate availability and high cost of raw materials, power cost and concentration of mills in one particular area, non-availability of good-quality fibre, uneconomical plant size, technological obsolesceand environmental challenges, highlighted the ASSOCHAM paper.

With regards to the packaging industry,according to the Indian Institute of Packaging, the US$24.6 billion Indian packaging industry (constituting about 4 percent of the global packaging industry), which was growing at about 13-15 percent had a great potential as India's per capita consumption of packaging was just 4.3 kg, compared with 6 kg for China and 19 kg for Taiwan and 42 kgs for Germany.

The Institute sees the next phase of growth for the industry coming from organized retail and e-commerce, as more traditional retailers also take to online selling.

Majority of the online shoppers are between the ages of 15-24 years and as it is well known, the younger generation comparatively pay more attention to appearance and are additionally more cautious about the quality of packaging of the products they buy.

Packaging for E-Commerce products delivered from one place to another need to consider more factors like product safety, ease of storage and transportation, etc. and so has to be different from the usual retail industry. Receiving an E-Commerce package is almost like receiving a gift that one bought for oneself and this brings challenges and opportunities for the packaging industry.

According to a report prepared by FICCI and Tata Strategic Management Group, the packaging industry in India is expected to reach US$73 billion in 2020.

Company Overview

Yash Papers (located in Faizabad, India) is synonymous with machine-glazed varieties of paper. The brand revolves around the manufacture of the best wrapping grades of papers in India. The Company manufactures MG wrapping papers in both brown and white varieties.

 Established in 1981, by entrepreneur-promoter K.K. Jhunjhunwala - with an installed capacity of 1940 MT per annum in 1983, Yash Papers started production of low grammage Kraft grades. Once this first paper machine became stable, additional capacity of about 2000 MTPA was created on this machine.

 In the year 1991, the Company set up its Paper Machine II, with a capacity of up to 6000 MTPA, taking the overall capacity to 10,000 MTPA. This machine also specialized in low grammage Kraft varieties.  This new machine, along with the enhanced capacity of the old one, helped to create dominance over the low gram mageKraft market for the Company.

 In the year 1995, Yash Papers set up its own 2.5 MW Power Plant, with an Extraction-cum-Condensation Turbine. This was a revolutionary step for a mill of its size at that time. This lowercost of power gave it an added advantage over other mills, and further helped brand Yash to become established in the market.  At the same time, the Company set up further capacity enhancements to its Paper Machine II, and boosted total production to 16,000 MTPA.

 In 2007, Yash Papers, grew to more than double of its capacity, by installing a totally new integrated plant, setting up a pulp mill, producing 130 TPD, Paper Machine III, to produce bleached MG grades of papers with a total capacity of 70 TPD, a chemical recovery unit, and a 6 MW Power Plant. This plant is running at full capacity from 2008.

 At the present time, Yash Papers has grown into the largest manufacturer of wrapping grades in India, with a present installed capacity of 39,100 MT per annum. Yash Papers practices a singular discipline, focus on specialty products and quality and has a culture of ploughing back surpluses into additional capacity.

 The Company’s product mix include- hard tissue, wrapping grades, packaging, and stationery grades. These varieties are used in specialised downstream applications like soap wrapping, food wrapping, pharmaceutical covers, interleaving sheets, laminating sheets, paper bag, bidi wrapping, gum tape, notebook covering paper, PE coating in mattress, tube light packaging among others.

Financial Statement Analysis

1. Promoters have 40.07% shareholding (increased from 35.09% in FY16).
2. The promoter remuneration in FY17 totaled 1.29 crore, which is 20.17% of the Net Profit.
3. The Operating Cash flow hasremained significantly above Net Profit over the past 5 FYs which means that the quality of earnings is good.

(In Rs. Crores)

	2017	2016	2015	2014	2013
Operating Cash Flow	19.04	20.84	23.44	12.55	2.72
Net Profit	6.38	2.85	-6.66	1.95	1.69

4. The major cash outflows during theyears were:

(In Rs. Crores)

	2017	2016	2015	2014	2013
Fixed Assets Purchased	36.33	5.79	3.50	11.38	3.59
Interest Payment	12.94	13.60	14.64	13.00	11.86
Repayment of Long Term Borrowing	15.52	11.80	4.96	0	0

5. The company has been takinghigh debt over the past 5 years, and the debt to equity ratio has remained around 1.35, which is on the higher side.
6. The new borrowings taken during FY17 were38.46 crore long term, and 10.63 crore short term which is rather large considering their total Equity is 55.9 crore.
7. In the past 6 years, the accounts receivable has actually remained stable (0% CAGR), which means that more and more cash is entering the company. Also, the CAGR of Inventory is 16%, which is almost in tandem with the sales CAGR of 15%.
8. The company has had Net Loss in one of the past five FYs (FY15) of 6.66 crore, however this was due to Certified Emission reductions written off of 15.48 crore.
9. The Sales have increased at a CAGR of 15%, however the Net Profit has grown at a CAGR of 65%, which shows that the company is getting better at cost management.

Strengths &Opportunities

1. The paper industry has received a lot of heat for being bad for the environment, however, since Yash’s paper products are made from bagasse and rice husk – a renewable source, they can capitalize on this concern for the environment.
2. Also, the fact that all of the company’s fuel needs are met through renewable energy from their own captive, off-grid biomass-based power plant that consumes rice husk as fuel, will make it easier for the company to grow in an age where customers are getting more environmentally conscious.
3. Yash Paper’s also won the 2018 Red Dot award for breakthrough design in backyard compostable tableware for its brand CHUK, which will give it more recognition in the international market. 

Weaknesses & Threats (things to notice)

1. The promoters have pledged all of their shares.
2. They have disputed tax amounting to 14.76 crore and contingent liabilities worth 16.56 crore.
3. In related party transactions:
   1. In FY17 – Mr. Ved Krishna (MD) gave 9.25 crore unsecured loan to the company.
   2. At the end of FY17, it had unsecured loans worth 3.15 crore from Yash Agro Products Ltd. in which one of the directors, Mrs. Manjula Jhunjhunwala is also a director.
   3. The company paid 33.11 lakh to a Jingle Bell Nursery School Society.
4. The CFO is paid only 14.4 lakh, which is a meagre 2.25% of Net Profit, which seems suspicious for a company that has NP of 6.39 crore in FY17

Conclusion

The company has shown phenomenal growth in past 6 years with a sales growth of 15% p.a. but a NP growth of 65% p.a., hence the company seems to not only be increasing the demand for its products but also the management of its existing costs. However, there are a couple of things about the company that are jarring, particularly – the fact that the company has low NP % (Highest-6.08% in 2018), and the fact that all of the promoters shares are pledged.

CA.BinoyJ.Kattadiyil