Kora Kagaz - Seshasayee Paper and Boards Ltd

Companies are exposed to risk and volatility and hence it is a fine art to develop and sustain an enterprise for more than two decades. In this context, it is an endeavour of mine to identify companies that can survive more than two decades and thrive by reducing their exposure to risk.  Such comapnies often tend to grow slow and then grow fast. 

This article covers one such company that is publicly traded but is not owned by any mutual fund. This article is not an investment advice but an endeavour to learn more about this company and to learn about what makes this company a robust enterprise. 

The Enterprise: 

As mentioned before, none of the mutual funds have invested in this company and it could be because this ~Rs 1,800Cr market cap company with Rs1,337 cr in reserves (and no debt) is too small for the mutual fund industry. However, this 60 year old company is old enough to have seen multiple wars, draughts, financial and political crisis. 

Boring, is a word that I can associate with this company. Those fast movers, might find it is difficult to say the name of the company, Seshasayee Paper Board Ltd. Boring is the location of the two paper mills of this company, Erode and Tirunvelli. That is far away from Jaipur, Lower Parel, Kolkata and Rajkot. Boring is the fact that the company doesnt hold quarterly meeting with investors. Instead, quarterly financial announcements contain a one page letter from the chairman. Who wants to read a letter? Boring is the fact that the company pays dividends once a year in July and has done that since 2003. Boring is the industry in which it operates, PAPER. 

Paper might seem to be an aging industry or is it? Food that are ordered online via apps like Zomato and Swiggy arrive in a PAPER bag. If your food arrived in a poly bag then it is going to change soon. Most ecommerce purchases from Nykaa, Flipkart, Amazon and Myntra arrive in carton boards. All this requires more PAPER. Many countries (including India) have banned single use plastic and this will require more PAPER cups, PAPER straws and PAPER bags. Finally, the National Education Policy (India) 2020 is being rolled out across different states  and this new policy requires text books to be published. These new publications will increase the demand for PAPER.  

Now, if you feel a little excited about this company, the name of the company is SE-SHA-SA-YEE paper and boards (SPB). 

Paper industry in India:

 Global paper production in FY 21 was 416MT. The leading producer of paper, China, contributed 100MT. India produced 20MT and is the fifth largest producer of paper. Of this 20MT,  Seshasayee paper has total production of 255,000T per year. The total paper production for SPB in FY22 was 212,000T and that means the plant were running at 80% of the rated capacity. The 1H for FY23, the production was 121,000T  and the plant is operating at 100% capacity.

Here is the breakdown of the production capacity of some of the leading paper producers of India

	Paper (T)	Packaging Board(T)	Total (T)
JK Paper	470,000	761,000	761,000
TNPL	400,000	200,000	600,000
West Coast Paper	-	-	300,000
Andhra Paper (subsidiary of West Coast Paper)	-	-	~280,000
SPB	-	-	255,000
Satia Industries	-	-	205,000

More about SPB: 

Seshasayee paper has two units in Tamil Nadu and they are located at Erode (165,000T) and Trinuelveli (90,000T ).

SPB has not only increased its production capacity over the years but also integrated its operations by incorporating a sugar mill (Ponni Sugar Erode) that provides raw materials (bagasse) for its paper plant. The paper plant provides recycled water from the plant to the local sugarcane farmers who then sell their produce to Ponni Sugar. The waste from the sugar plant is the raw material for the paper plant. This symbiotic relationship has only thrived in the last decade. 

 

 As can be seen  in the following chart, the company has increased capacity at a steady pace. The company has  completed three mill development plans and the last mill development plant (MDP) was completed in FY22.  As part of this MDP (about Rs 300cr), paper mill 1 and paper mill 5 were upgraded in FY21. Subsequently, paper mill 2 and paper mill 4 were upgraded in FY22. Apart from that, the pulp generation capacity was also increased to 154,000T. The MDP program also expanded the product portfolio of the company to include multi layer paper board. These upgrades were planned and executed over a period of time without impacting production. 

 Although, some minor works are still ongoing, the majority of the CAPEX is complete. This allows for the quarterly cash flow of 90cr to be utilized for dividends, further expansion (possible acquisition of Servalakshmi Paper Limited via NCLT) . 

Dividend return for shareholder: 

There are 6,30,68,140 shares and that assures a decent dividend return for investors. The dividend distribution policy of the company states (apart from other things) that 15% of the standalone PAT will be shared with shareholders. On the topic of dividend, it has two subsidiaries that generate dividend income for SPB, Ponni Sugar and High Energy Batteries. 

Here is review of the dividend history of the company (according to data on  Trendlyne). The last two years were impacted by COVID lockdowns and hence the drop in dividends. It should also be noted that the shares were subdivided in 2019 and hence the drop in dividend paid in 2020-2022. 

Shareholders of the company: 

This 1800cr (as of 18th Dec 2022) company has about 19,000 shareholders and major shareholders are listed below. These shareholders not only have long term investment interest in the company but are also inclined towards increasing their stake in the company.  

• Tamil Nadu Industrial Investment Corporation (TIIC) - 14% 
• Ponni Sugar Erode Ltd (a subsidiary of the company) - 14% 
• Synergy Investments Pte Ltd - 12% 
• Time square investment pvt ltd - 10 % 
• Atyant capital India fund - 5% 

Financials of the company:

The company has grown its revenue slowly from Rs 500 Cr in 2011 to Rs 1355 Cr in 2022 but it has built a strong balance sheet with zero debt. This provides the foundations for the company to grow at a faster pace. For instance, the profit after tax for FY22 was Rs 103cr (compared to 65Cr in FY12) but the PAT for the first half of FY23 is 162Cr. This is how companies grow slow and then grow fast.

Based on the data available in www.screener.in , here is a financial snapshot of the company. 

Board of Directors:

Sri N GOPALARATNAM has been the Chairman of the company since 2001 and is aged about 75years and expected to remain in chair until FY26. He is also the chairman of Ponni Sugar, Time Square Investments, ESVI international and High Energy Batteries India Ltd. 

Kasi Viswanathan is the the managing director of the company and has been with the company for more than 15 years. 

V Sridhar is an independent director and is on the boards of Dabur India , Artenius Medicare and IIFL wealth management. 

Risks: 

Although, the financial power of the company make it a resilient enterprise. However, it is still exposed to risks and they are listed below. 

• The mind share of the board is split among multiple companies : Seshasayee Paper, Ponni Sugar, High Energy Batter etc. 
• The succession planning of the company is critical for smooth management transition. 
• The company relies on raw material like wood, imported pulp, coal and water. Therefore, commodity shortage can impact the production capacity. An unfavourable monsoon (or availablility of water in river cauvery ) can adversly impact the paper production in the company. 
• Over the last few years, many paper companies have expanded their capacity and this would mean that the capacity of available paper would increase thus reducing the already low margin business of paper. 
• FY23 is expected to be a cash generating year for the company and any capital allocation mistake can be a drag on the growth of the company.
• Finally, the two plants of the company are based with the same state and close to each other. This provides great operational synergy but it can create a location risk for the company. 

Conclustion: 

 Seshasayee Paper and Boards Ltd seem to have benefited from decades of slow growth. With a cash surplus balance sheet and zero net debt, the company is now ready to grow faster. The company has the advantage of having a 'Kora Kagaz' to draw its a future that is stronger and resilient. 

References:

Annual report FY 22  : https://www.bseindia.com/bseplus/AnnualReport/502450/73346502450.pdf

Dividend Distribution Policy : https://www.spbltd.com/wp-content/uploads/2022/08/policy/DDP.pdf

Financials of the company are available on the following links: 

• https://www.screener.in/company/SESHAPAPER/#quarters
• https://www.screener.in/company/SESHAPAPER/#profit-loss
• https://www.spbltd.com/financials/index.html