INVESTMENT RESEARCH. DARK HORSE - Genus paper & boards Ltd. Ban on Plastic bag to boost demand for paper

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1 INVESTMENT RESEARCH Dated : 08th August 2018 ACCUMULATE Price ` 12 Fair Value 20 Multibagger Div Yield - Tenure 2-3 years Sensex 37, Nifty 11, Group/Index B Stock Details M.cap (` in cr) 319 Equity (` In cr) wk H/L ` 16.70/4.95 Face Value ` 1.00 NSE code GENUSPAPER BSE code Key Valuation Ratios RONW 5% P/E P/BV 0.9 EV/EBIDTA 8.50 Key Financial Data EV (`in cr) BV (`in cr) NW(`in cr) EPS (TTM) 0.70 IN ` Share Holding Pattern Promoter Others DARK HORSE - Genus paper & boards Ltd. One of the leading manufacturer of multi-layer Kraft paper in India with a preferred supplier for corrugated box manufacturers & a DOMINANT player in North India. Ban on Plastic bag to boost demand for paper Company have performed very well for the FY 2018, the year has started on a encouraging note. Along with improved sales volumes, the mix has changed favorably towards the value-added products. After Maharashtra, Uttar Pradesh has become the 19th state in the country to ban the usage of plastic bags. The ban will further boost the demand for the Kraft paper for manufacturing of paper bags & Genus being the dominant player in North India, would stand to benefit for the same. Non-binding MOU's with GOI- ` 1650Cr Company has entered into two non-binding MoU with Government of Maharashtra to invest `1,050cr for setting up of Kraft Paper manufacturing plant and with the Government of Uttar Pradesh to invest ` 600cr for expansion of current manufacturing facility. The company will incur the investing amount within a period of 5 years from the date of application after completion of all effective steps. Competitive Advantage Company enjoys competitive advantage amongst other players. Has one of the largest capacities in Northern India. 11 MW Co-generation Captive Power Plant generation. Licensed bore well for sufficient Water Supply for its requirement. Zero liquid discharge plant with full fledged waste water treatment plant. Strong relation with key FMCG customers. Expansions Investment Rationale With growing demand company have undertaken a Brownfield expansion at its existing facility in Moradabad through debottlenecking. This will enhance the existing capacities by 50,000 MTPA. Company is continuously focusing on premiumization of products and improving internal efficiencies. With a strong start of the year, is confident of continuing on the growth trajectory for the coming quarters as well. Moreover, to address the Growing Demand, company have leased an operational manufacturing plant for a period of 5years. The facility is located at Kashipur, Uttarakhand and has manufacturing capacity of 75,000 metric tonnes per annum (MTPA). This plant will cater to demand of existing clients of Genus paper and would help to add few more clients in that region & has enhanced its manufacturing capacities by 50%. Moreover, its Asset light strategy helps to move faster in the long term and build a sustainable business model. 50% 50% Leased Plant and Brownfield expansion is in line with Management Vision to further Strengthen their Foothold in Northern India Also, Company is a preferred vendor for large FMCG clients. Major Customer includes HUL, Dabur, Onida, Moser Baer, Samsung, LG, whirlpool, Eveready etc. VALUATION (` In Cr except per share) FY 21Est. Earnings Equity Share Capital FV 1.00 No. of Equity Shares EPS(FY21Est.) 1.27 Estimated Price/share 20 Note: P/E has been estimated around 16xs Corporate Governance Transparency Ratio's Year End Tax Rate % Receivable days Source: Google Div. Payout % Page 1

2 Growth Drivers Exponential Growth in DEMAND Shift to value added products- PREMIUMIZATION RECYCLE & RESUE of waste paper LOCATION advantage FY18 Revenue Break up 56% 44% Higher the Burst Factor (BF) better the realization REVENUE (` in Cr) Up to 20 BF Above 20 BF Way Forward Add new capacities via organic and inorganic modes Higher sales of Kraft Paper with Bursting Factor (BF) greater than 22 Focused towards increasing asset productivity, operating efficiencies and strengthening the competitive position Increased product offering of better quality to customers Better Realization Improved operating efficiencies RESULTS CORNER FY17 FY18 Quarterly Highlights- Q1FY19 The Revenue stood at `121.0 Cr for Q1FY19 as against `72.8 Cr in Q1FY18 recording a growth of 66% YoY led by high volume growth. Company reported EBITDA of ` 11.1 Cr for Q1FY19 as against ` 7.3 Cr in Q1FY18 recording a growth of 51% YoY. EBITDA margin stood at 9.1%. PAT has increased by 113% YoY to ` 5.1 Cr in Q1FY18 EBITDA (` in Cr) FY17 PAT (` in Cr) FY18 Catering to Diversified Industry Needs from FMCG to Industrials to Ecommerce Kraft Paper Kraft paper is a type of industrial paper and used by packaging industry for manufacturing corrugated boxes and liners, corrugated sacks and composite containers. Company offers Multi Layered Kraft paper with High Tear Factor (TF), High Burst Factor (BF) i.e. range from 18 to 40 BF with GSM ranging from This paper is used to the extent of around 90 % by corrugated box manufacturer which includes FMCG, Consumer Durables, Pharmaceuticals, Garments, textiles & footwear, E-commerce, served by Genus. FY17 FY18 Mild Steel Ingot Contribute less than 5% of the total business. Steel ingot is manufactured by using the excess power generated in cogeneration plant after meeting the requirement for Kraft paper. This product is used for manufacturing various types of steel bars by rolling mills. Current capacity Owned MTPA at Moradabad(UP) Leased MTPA at Kashipur(Uttrakhand) Total: MTPA Future Prospect Kraft Paper demand to outspace supply Strong Presence of FMCG & Consumer durable Co's in North India Brownfield Expansion by 50000MTPA at Moradabad(UP) Page 2

3 Cater to needs of multiple industries INDUSTRY ANALYSIS Indian Economy The Indian economy grew at 6.7 per cent in The 7.7% growth rate achieved during Q4 FY18 puts India as one of the fastest growing economies in the world. With private consumption picking up, rural economy recovering and investments reviving as reflected in IP capital growth index and gross fixed capital formation (GCF), India s growth should remain positive with both the World Bank and IMF predicting a higher growth trajectory in the years ahead., For FY18-19 the economy is projected to grow at 7.4%. Global Paper Industry Globally over 400 million tones of paper and paper products are consumed. The world s three largest paper producing countries are China, the United States, and Japan (these three countries account for approximately half of the world s total paper production), while India accounts for a small but growing share of the global market. The global paper and pulp industry has contracted slightly over the past five years, primarily due to disrupting technology, and shift in customer demand. However, the decline in growth in developed markets are expected to be offset by the demand growth in India, Middle East, Africa and Asia. Indian Paper Industry The domestic demand of paper and packing is ~14 Million metric tones, which accounts for ~4% of the world s consumption. The estimated turnover of the industry is ` 50,000 crores, contributes ` 4,500 crores to the exchequer and provides employment to more than 0.5 Million people and 1.5 Million people indirectly. The Indian paper industry is highly fragmented with ~ 750 paper mills, of which ~6% have capacity of 50,000 MT and above. The reduction of import duties (10% to Nil) on paper and paperboard from ASEAN countries pose a challenge to India paper industry. During the year FY18 the imports of paper and paper boards touched 1.9 MT which is ~ 35% higher than FY17. The higher cost of fiber and capital in India affects the competitiveness of the Indian players and could potentially impact the relevance of local players. Kraft Paper: Industry Dynamics Demand for Kraft Paper to outpace the production Genus Paper has recently expanded its capacity by ~50% by leasing a manf. plant Looking for other organic and inorganic means of capacity expansions Page 3

4 Outlook The Chinese government s move to ban waste paper amidst environment concerns is expected to benefit the Indian paper manufacturers. Waste Paper (WP) is one of the major sources of raw material used for manufacturing the recycled paper products. The Chinese Government s decision to ban waste paper imports has caused a drop in global waste paper prices. As a result, the price of recycled paper in China, used for packaging material, has increased due to short supply of WP. Indian manufacturers using waste paper stand to benefit on account of lower global waste paper prices (on excess supply) and higher realization for recycled paper. To conclude, the global shortage of wood pulp has resulted in increasing prices of finished paper. Indian wood pulp based having requisite self-sourcing (farm forestry) are expected to benefit from increasing global finished paper prices- Indirect benefiting GENUS. Company Overview Incorporated in 2012, company is engaged in manufacturing of Multi-layer Kraft Paper & Mild Steel Ingot. Kraft Paper is classified as industrial paper and is used by packaging industry in making corrugated boxes and liners, corrugated sacks and composite containers. Multilayer Kraft paper contribute more than 95% to the total revenue. The Company's plant is located at Moradabad, Uttar Pradesh with total capacity of 215,000 MTPA and has two independent plants within the factory premises. Valuation Conclusion The Paper Industry in India is growing steadily with increasing demand from various customer segments like education, business & corporate and commercial printing. The demand and growth drivers have come from a combination of factors such as rising income levels, growing per capita expenditure, rapid urbanization, industrial production, government spending on education and increased school enrollments. Higher disposable income coupled with urbanization is expected to drive new and different consumer behaviors and drive demand for paper products. Company have performed very well for the FY Along with improved sales volumes, the mix has changed favorably towards the value-added products. The ban on plastic in UP will further boost the demand for the Kraft paper for manufacturing of paper bags & Genus being the dominant player in North India, would stand to benefit for the same. Moreover, company's focus on Premium products going forward, Brownfield expansion, signing of MOU, add new capacities via organic and inorganic modes & Strong clientele (catering to packaging needs of multiple industries- Dabur, Unilever, Havells, LG, Lays, Pepsi, Samsung, Patanjali etc.) attracts the share price at current levels. Estimating the share price of the company as per P/E valuation, the estimated share price for next 2-3years tenure turns to be around ` We recommend to Accumulate the stock at current levels to achieve long term gains. Page 4

5 Quarterly Results (` in cr except per share) Particulars LTM Net Sales EBITDA Depreciation Op Income Misc.Inc (Exp.) Interest Exp EBT Taxes Net Inc(Reg) Extraord. Items Rep Net Inc EPS Income Statement and Estimates ( ` in Cr except per share) Particulars E 2020E 2021E Sales(Net of Excise) Other operating Income Total Inc. from operations Operating EBITA Profit & Loss Total Inc. from operations TOTAL EXPENDITURE EBITDA Depreciation (10.18) (11.75) (12.43) (12.92) (13.73) (14.77) (16.07) Rep. profit before othrinc., fin.cost,tax & excp. Item Goodwill amortization Rep. profit before othrinc., fin.cost,tax & excp. Item OTHER INCOME Profit from ordinary act. Before Fin.Cost,TAX & Exp.Items Net financials Interest income Interest expenses (6.18) (6.28) (5.92) (6.08) (8.21) (9.73) (12.53) Net Financial Items (6.18) (6.28) (5.92) (6.08) (8.21) (9.73) (12.53) Reported Pre-tax profit Reported Tax charge (4.68) (3.96) (2.42) (7.61) (10.03) (12.96) (16.66) Reported Net profit Minorities P/L OF ASSOCIATE CO Rep. NP after min. Int Extra Ordinary income - (1.75) Rep.Net Income after extra ordinary items EPS and Dividend Dividend Paid Retained earnings Reported EPS DPS - originally declared Number Of Shares Opening Balance Issued Bought Back Closing Balance FV Wtd. Avg. no. of shares Note:- The figures shown in the brackets means NEGATIVE. Page 5

6 BALANCE SHEET Particulars E 2020E 2021E Equity & Liabilities Shareholders' Fund Share Capital Reserves and Surplus Minority Interests Total Shareholders' Fund Non-Current Liabilities Long-term Borrowings Other LT Liabilities Deferred Tax Liability Long term Provisions Total Non-Current Liab Current Liabilities Short term Borrowings Trade Payables Other current liability Short term Provisions Total current Liab Total Equity & Liab Assets Non-Current Assets Fixed Assets Tangible fixed Assets G/W On Consolidation Non-current Investment Long term L&A Other Non current Ass Deferred tax receiv Total Non-Current Ass Current Assets Current Investments Inventories Trade Receivables Cash & cash Equi Short Term L&A Other current Assets Total current Assets Total Assets Cash & cash equivalents Other int. bearing assets Interest-bearing debt Net interest-bearing debt Investments Tangible assets Gross capex (32.58) (12.12) (3.15) (33.74) (27.78) (32.49) (38.41) Sale of fixed assets Net capex (32.58) (12.12) (3.15) (33.74) (27.78) (32.49) (38.41) Depreciation tangibles (10.18) (11.75) (12.43) (12.92) (13.73) (14.77) (16.07) Note:- The figures shown in the brackets means NEGATIVE. Page 6

7 RATIO ANALYSIS Particulars E 2020E 2021E Return on assets % 1.30% 3.13% 3.66% 4.27% 4.85% Return on equity % 1.77% 4.40% 5.39% 6.56% 7.84% ROCE % 2.29% 5.51% 6.44% 7.51% 8.73% EBIT Margin % 4.95% 8.28% 9.55% 10.36% 11.27% Pre tax margin % 3.03% 6.53% 7.48% 8.26% 8.98% Net Profit Margin % 1.84% 4.32% 4.95% 5.47% 5.95% Total asset turnover Fixed asset turnover Equity turnover Current Ratio Quick Ratio Cash Ratio Receivable Days Inventory Days Payable Days Conversion Cycle (Days) Financial Leverage Effect Debt to Capital Debt to Equity Note:- The figures shown in the brackets means NEGATIVE. Page 7

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