WEST COAST PAPER MILLS : PROFITING FROM A FUTURISTIC OUTLOOK
With the focus of the paper industry now shifting towards more eco-friendly products and technology, West Coast Paper Mills finds itself in the right position to take advantage of its upgraded operations and expansion plans that include a shift towards products of the future
West Coast Paper Mills (WCPM) has been enjoying a leading position over the past 61 years as a premium brand in the paper industry. The company is acknowledged both in India as well as abroad. It keeps a constant vision of up-gradation of its processes and technology in order to offer uniform quality of customised products and its focus on achieving mastery over ‘wood to paper product research’ has enabled the company to produce a wide portfolio of wood-free papers and boards of the highest quality. The product line of the company includes many well-established brands ranging from 52 to 600 GSM of commercial to premium grades of paper and boards, spread out across six different product segments: writing, printing, business stationery, specialty, industrial and packaging.
The company has six versatile machines with an installed capacity of 3,20,000 tonnes per annum, the latest addition being the 500 TPD state-of-the-art Voith paper machine, which has boosted the quality of the products to international standards. With the installation of the world’s most renowned Bielomatik online cut-pack converting line, the company has witnessed the quality standards of copier papers elevated to global benchmarks. The company has had overwhelming success for its copier grades viz. Documate, B2B, Copy Gold and Copy Plus which were able to create an upswing in the market for cut-size papers in quite a short period of time.
WCPM is located at Dandeli town in Uttara Kannada District in Karnataka on 240 acres of leasehold land. The mill is connected through a broad-gauge railway line on the Miraj- Bangalore section at Alnavar Junction, with railway lines that run up to the factory. It also owns additional 80 acres of leased land for projects like railway siding, effluent treatment plant, and so on. The company makes use of 100 per cent of the wood derived from casuarina, eucalyptus, subabul, acacia and others as an ingredient for manufacturing paper. The paper mill consumes about 9,50,000 MT of raw material per year. Private cultivators in Karnataka, Tamil Nadu, Andhra Pradesh, and Pondicherry are the primary providers of raw material to WCPM. The company ensures strict adherence to environmental norms.
Sector Overview
The world’s three largest paper producing countries – China, the United States and Japan – in totality account for approximately half of the world’s total paper production. The past couple of years have been better for the paper industry as there have been a few capacity withdrawals which helped to improve the utilisation of the existing capacities. The graphic paper market is expected to continue to face declining demand worldwide. But this decline should be offset by the increase in demand for packaging – industrial as well as consumer and tissue products. The demand for fibre-based products is expected to expand globally with a few segments growing faster than others.
A dicey spot might be the concern over how rapidly the demand will grow in China. Given China’s weight in the global paper and board market, even relatively modest slowdown could have a significant impact. The Indian paper industry has witnessed steady growth and the domestic demand increased from 9.3 million tonnes in FY08 to 17.1 million tonnes in FY18 at a CAGR of 6.3 per cent. Overall, the paper demand is expected to grow at a CAGR of 6-7 per cent and is likely to reach approximately 22 million tonnes in 2021-22.
The per capita consumption of paper in India currently is about 13 kg which is relatively lower compared to the global average at 57 kg per capita and 40 kg per capita for Asian peers. However, the per capita consumption is expected to rise to 17 kg by 2024-25. India holds the 15th rank among paperproducing countries in the world but the country’s contribution in global paper demand is steadily increasing with rising domestic demand whereas the demand in the western nations is contracting.
Financial Overview
In terms of West Coast Paper Mill’s consolidated quarterly performance, its net sales decreased to Rs 576.11 crore in Q3FY21 as compared to Rs 706.75 crore in Q3FY20, a decline of 18.48 per cent. The operating profit dipped by 61.35 per cent from Rs 166.82 crore in Q3FY20 to Rs 64.47 crore in Q3FY21. Q3FY21 recorded a net loss of Rs 4.76 crore as compared to net profit of Rs 75.20 crore in the same quarter in the previous year. On an annual basis, its net sales increased by 25.96 per cent from Rs 1,979.15 crore in FY19 to Rs 2,492.86 crore in FY20. The operating profit was up by 26.16 per cent in FY20 as compared to FY19. The net profit was 37.32 per cent higher in FY20 at Rs 406.49 crore as compared to Rs 296.01 crore in FY19.
In revenue terms for Q3FY21 and Q2FY21, the paper and paper board segment showed 23 per cent increase in revenue recorded in Q3FY21. The telecommunication cables segment posted a rise of 17.41 per cent. During the year 2019-20 the production of paper and paperboard had 98 per cent capacity utilisation against 95 per cent capacity utilisation in the previous year. On the other hand, cable production saw a decline due to the loss of operations in March 2020. Looking at exports, the export of paper and paperboard during the year was 3,588 MT worth Rs 21 crore (FOB) as against 2,530 MT worth Rs 17 crore (FOB) the last year.
Similarly, cable worth Rs 8 crore (FOB) was exported during the year as against Rs 4 crore in the previous year. Besides, in line with the growth plan the company carried out strategic acquisition of International Paper APPM Limited (IPAPPM) in 2019. Consequently, IPAPPM Limited has become a subsidiary of the company with total shareholding of 72.20 per cent. The acquisition was carried out from internal accrual, borrowings from banks and NCDs. The working of IPAPPM for the year ended March 31, 2020 was found to be satisfactory.
In spite of a weak financial performance during first half of FY21, it is observed that the liquidity position, both at the standalone and the consolidated levels, remains sustainable. Expecting the market conditions to reverse gradually, the cash flows are expected to remain comfortable along with the company’s debt repayment liabilities. The capital structure of the consolidated entity and debt coverage indicators would remain strong given its debt-free status at present and its healthy balance of cash and liquid investment. Owing to the sustainable liquidity status, credit rating agencies have reaffirmed the ratings assigned to the company.
Risks and Threats There exist some risks and concerns for the company. West Coast Paper Mills has derived 94.18 per cent of its revenue from paper and paperboard and cup stock board business and 5.38 per cent from its cable business in 2019-20. The concerns regarding the availability of conventional raw material will keep hovering over the operations, causing pressure on raw material procurement prices. An excessive inflow of raw material at cheaper price will raise some threat issues. Reacting to this, the company is fully equipped to take advantage of the single use plastic ban drive of the government and is in the process of developing substitute paper products to create new market share.
Future of Paper Industry Paper has found new applications across categories like packaging, paper bags, paper towels, tissues, etc. The paper industry has been seen witnessing a more competitive business environment and gradual end to the dominance by traditional western markets, which is giving a rise to robust playing fields for the world’s paper, tissue and packaging board industry. The paper industry in India is divided with over 750 paper mills, of which less than 100 mills have a capacity of 50,000 TPA or more.
Even if the mills exist from a long time, the technologies in use are from the oldest to a rather modest pattern. The focus of the paper industry is now shifting towards more eco-friendly products and technology. A variety of raw materials are used by the mills, namely, wood, bamboo, recycled fibre, bagasse, wheat straw, rice husk, etc. The species-wise share is 30-35 per cent wood-based, 45-50 per cent recycled fibre-based and 20-22 per cent agro residue-based raw material.
Conclusion
WCPM aims to continuously work on phase-wise investment at its paper division located at Dandeli for improving the paper quality, produce new specialty products and reduce usage of steam, power, chemical, water and also minimise the breakdown of machines. In order to achieve the position of a global leader, the company has been investing majorly into modernising equipment, improving quality and developing personnel. The company effectively manages its cost as it has fully integrated paper and pulp facility, which operates right from processing pulp from the woods to using captive power source. Also, in FY19-20 the company has significantly brought down its raw material cost by reducing the imports of costlier wooden chips from 43 per cent to 17 per cent.
FY19-20 saw a decent increase of 20-25 per cent in the business of manufacture and supply of optical fibre cables. The company will establish a draw tower project for backward integration of raw material for its cable division i.e. to manufacture optical fibre on its own. The working will be on greenfield expansion in Telangana which will be commissioned on approvals from Modified Special Incentive Package Scheme (M-SIPS). The land has already been acquired from the Telangana government. Considering the optimum capacity utilisation, better demand outlook and a planned shift into environmentally friendly and value-added products, we recommend BUY for this stock.