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Paper biz. to also drive growth hereafter!

Trident (TRID)’s Paper segment, which contributed 20%/55% to FY20 revenue/EBIT, is expected to post a better performance in the upcoming quarter. It would be supported by improving demand, led by the opening up of educational institutes and corporate offices and the start of a new academic year. TRID is yet to recover to preCOVID levels, particularly on the margin front – it is weighed by lower demand and prices. We interacted with the CEO of the Paper division of TRID – Mr Naveet Jindal to get his perspective on the Paper industry and TRID’s Paper division. Against this backdrop, in this note, we have highlighted the current demand situation and the pricing scenario for the Paper industry. We have further detailed how it is expected to move going forward. The following are the key insights:

World’s largest wheat straw-based paper manufacturer

* TRID is the world’s largest manufacturer of wheat straw-based paper, with annual capacity of 175,000mt.

* The company uses wheat straw, an eco-friendly raw material, which is a by-product of wheat. This facilitates easy procurement at attractive pricing as Punjab is the highest wheat-producing state in the country.

* TRID has 12% market share in India in the Copier segment; in NCR and the North region, TRID has 30%+ market share. In Punjab, the company has market share of 50%.

* Wheat straw constitutes 65% of the RM for TRID – it is procured from within a 100–150km radius. Avg cost of wheat straw (bone dry metric ton) is INR4,550/mt.

* Waste wood chips make up the remaining 35% of the RM. These are generated by the Wood industry and procured from within a 150km radius. The cost of wood chips stands at INR8,500/mt.

* Cost of manufacturing wheat straw-based paper is lower v/s wood-based paper manufacturing. This ensures a higher EBITDA margin of 35.7% (FY20) v/s peers (JK Paper: 28.5%, TNPL: 18%, West Coast: 25%). For FY20, EBITDA/mt for TRID stood at INR21,879 – v/s JK Paper at INR15,500, TNPL at INR11,059, and West Coast at INR16,457.

* TRID’s capacity utilization in the Paper segment stood at 86% in FY20, with EBITDA/mt of INR21,879 (down 19% YoY, primarily due to price decline).

* In 9MFY21, the Paper segment’s revenue/EBIT declined 31%/52% YoY on account of 16% decline in sales volumes. This was weighed by lower demand on account of the pandemic (lower demand for copier paper / maplitho as offices / educational institutes were closed and lower demand from government institutions) and 15% YoY decline in realization.

* Capacity utilization for 9MFY21 stood at 74% for Paper; this was 87%/80% in 3QFY21/2QFY21. In Jan’21, plants were operating at 91% capacity utilization.

Demand and pricing recovery already underway

* Capacity utilization in the industry: During Apr–Sep’20, India’s Paper industry was operating at 55–60% capacity. The same stood at 70–75% during Oct– Dec’20. It is now operating at 95% capacity utilization.

* Recent demand trends: Packaging board consumption has exceeded pre-COIVD demand levels on the back of higher e-commerce sales and consumption of packaged foods. Around 30% of writing and printing (W&P) paper is consumed by the Education sector (schools and colleges) in India, which has been impacted by the pandemic. The new academic year in India starts in June; the industry is expected to reach normal demand levels by this time.

* Paper pulp prices have now begun to rise on demand revival and waste paper shortage: Recently, pulp prices have increased to USD650/mt from lows of USD460–470/mt in Oct/Nov’20. Twelve months ago, pulp prices stood at USD750/mt. For pulp manufactures globally, prices need to remain in the range of USD550–575/mt to stay viable.

* Thus, in India, paper prices increased 2–5% over Jan–Feb’21 on the back of an increase in global pulp prices and demand revival.

* As per industry sources, copier paper prices increased 2–3% and maplitho prices 3–5% over Jan–Feb’21. W&P paper price is further expected to increase by INR1.5–2/kg in Mar’21.

* For TRID, paper price pre-COVID stood at INR53–54/kg and declined 22–23% in Mar’20. The company has increased paper prices by INR8–9/kg. It is taking new orders at pre-COVID rates only, and intends to further raise prices by 1–1.5/kg.

Textiles and Paper segments to drive earnings momentum hereafter

* In FY21, TRID’s Textiles division has aided performance on the back of demand revival in the Home Textiles segment. The demand trend is expected to continue in the coming quarters on six months of order book visibility.

* However, performance in the Paper segment over the past three quarters was impacted by the closure of educational institutes and corporate offices; however, demand is expected to improve going forward on the gradual opening up.

* Thus, we expect the Paper segment’s revenue to grow 29%, with EBIT growth of 66% in FY22.

Valuation and view

* Work-from-home in most of the big cities across the world has contributed to demand revival in Home Textiles – with people spending more on home improvement products as the home has become their primary workplace. Demand revival was further supported by government stimulus, consumer focus on health and hygiene, etc.

* The company has seen a strong 2Q and 3Q for Home Textiles. This trend is expected to continue in the coming quarters on account of order book visibility for the next six months.

* Additionally, TRID’s performance in 4QFY21 and FY22 would be aided by improved demand visibility and higher prices in the Paper segment.

* The management has unveiled its ‘VISION 2025’, wherein it targets revenue of INR250b by CY25, with 12% PAT. The board has authorized its Strategy Committee to examine various rapid growth strategies to achieve its vision. The committee would explore various options, including (but not limited to) the following: i) unlocking value for shareholders through restructuring existing businesses, ii) capital allocation strategies to improve return ratios, iii) expanding existing businesses / diversifying into new businesses through organic/inorganic growth, and iv) penetrating new markets, undertaking product development, e-commerce, and brand building. We await further clarity on how the management would achieve this vision.

* We value TRID at 14x FY23E EPS to arrive at TP of INR19. Maintain Buy.

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