Dear Shareholders,
Of all the challenges that the Indian paper industry faces today,
the biggest is the question: Is it enhancing value?
At a time when every stakeholder would like to be associated with
companies that enhance the value of their holdings, this is indeed an
interesting question.
Something to think about
Evidently , a number of investors would be inclined to believe that the
Indian paper industry is a relative under performer when compared with
other industries competing for his capital on the basis of the following
arguments:
- The major paper mills reported net margins ranging between 5 and
11 percent in 2004-05, based on the results of a few large Indian
mills, which may be interpreted as lower than most core competing
industries.
- The price-earning ratio of most large paper mills ranged between 5 and 10 based on their 2004-05 results significantly lower than the discounting of a number of India’s core industries
A number of reasons for optimism
Not surprisingly, investors are likely to be disappointed with this
return on their invested capital. In addition to this, the intent of
West Coast to invest not less than Rs.820 cr in the business over the
coming four years likely to raise the spectre of fresh debt and equity
being raised, diluting earnings.
Permit me to state that as the custodian of the interests of out owners.
We have taken a considered decision to proceed with the investment
because we are convinced that it will enhance the value of their
holdings over the long term for the following reasons:
The future belongs to large integrated and well-managed mills. I have
chosen each word with care; ‘large’ refers to economies of scale,
‘integrated’ will reduce production cost and ‘well-managed’ will cover
strategy prudent funding and all the other initiatives that account for
the difference between a successful company and an also-ran.
There are signs of a concerted initiative among India’s largest paper
manufactures to collaborate in a non-competitive way at an industry
level to create a large and common wood resource, which will rationalize
raw material costs as we go along, even as they increase for alternative
raw material users due to their being relatively unorganized.
The tightening of India’s tax system will plug the loopholes hitherto
utilized by a certain section of paper industry. This has already begun
to transpire; the introduction of the value added tax form April 2005
impacted a number of manufactures outside the taxation system and
translated into improved industry realizations by around Rs.400 per
tone.
As the business trends towards higher economies of scale ,the smaller
manufactures will find it difficult to compete on a playing field
becoming increasingly level, resulting in capacity exit or
consolidation.
The imposition of the Corporate Responsibility for Environment
Protection (CREP) guideline from 2008 may after the smaller manufactures
who find it difficult to mobilize resource for re-investment, creating a
gap in paper availability and translating in to higher realization for
the then existing manufacturers.
Something to cheer about
At West Coast, We are better placed to protect and enhance value for our
owners despite this large investment for a number of reasons:
Our gross block per tone of installed capacity is only Rs.28, 000 way
below the prevailing Greenfield cost of Rs 80,000 per tone; the increase
to Rs.50,000 per tone of installed capacity following our expansion and
modernization programme will still be well below the greenfield cost,
protecting our interests against fresh competition.
At an investment of around Rs820 cr, the company is enhancing production
capacity by around 90000 tpa (which is an the greenfield cost today) and
commissioning a 230,000 tpa pulp capacity; the latter likely to generate
an attractive annual surplus due to significant cost reduction well into
the long-term.
In a business with increasing input costs we hove 100 per cent power
coverage and adequate water availability.
We are proximate to the most attractive consuming markets in India —
Bombay is 700 kms away and Bangalore 500 kms away.
We project a decline in the average procurement distance from 650 kms to
250 krns following an increase in plantation capacity and throughput.
We have invested in an extensive, effluent treatment plant and other
assets making us completely CREP compliant before the mandatory
deadline.
De-risking
Looking ahead, we expect our performance to be better in 2005-6 as a
result of the benefits of the expansion cum modernization, which we
completed in 2004; we expect that in December 2005 will reduce power
cost in 2006-7; we expect to make improvements in our production process
thereafter until we commission our upcoming expansion and modernization
by 2009.
So from a defensive perspective permit me to say that had we not
embarked on this Rs.820 cr programme our business would hove begun to
generate negative returns a decade from Flow; from an aggressive
perspective, will state that this investment (and the one prior to it)
will enhance returns and margins across the foreseeable future.
Sincerely,
S.K.Bangur
Chairman and Managing Director
For more information Contact Us.
