Analysis: Ruchira Papers Limited

Modified on July 1, 2018

This article provides in-depth fundamental analysis of  Ruchira Papers Ltd, a north India based paper manufacturing company dealing in writing & printing paper and kraft paper (packaging paper).

Ruchira Papers Ltd

Reader’s Query 

Hello Dr Vijay Malik Sir, Congratulations and thank you for a wonderful blog on fundamental analysis. Can you please give your insights on Ruchira Papers Ltd.? I have attached my analysis, checklist summary.

Company: Ruchira Papers Ltd

Industries: Paper & Papers Product

The Company is engaged in manufacturing of Writing & Printing Paper which is used for manufacturing of Note Books, Publications etc. and Kraft Paper which is used as a Raw Material in Packaging Industry. The factory is based in Himachal Pradesh close to Baddi, which is an important centre for FMCG and Pharma manufacturing.

Indian Paper Industry Overview:

India ranks fifteenth among paper producing countries in the world with a total installed capacity of approximately 12 million tonnes per annum. Even as paper consumption has steadily increased, India’s per capita consumption has remained at a meagre 10 kilograms compared to the global average of 60 kilograms. The paper industry in India is primarily categorised into W&P (writing and printing), paperboard and newsprint segments. India is nearly self-sufficient when it comes to the indigenous production of most varieties of paper and paperboards, even as certain varieties of specialty papers are imported. Despite accounting for 17% of the global population, India accounts for a mere 3% of the world’s paper and paperboard production, a reflection of its low literacy. The estimated turnover of the industry is Rs. 35,800 crore and provides employment to more than 370,000 people directly and 1,300,000 indirectly.

(Source Annual Report FY2015-16)

CHECKLIST:

Criteria

Value

Ruchira Papers Ltd

Remarks

FINANCIAL ANALYSIS

1

Sales growth

CAGR >15% for last 7-10 years

19%

Growth should be consistent year on year. Ignore companies where sudden spurt of sales in one year is confounding the 10 years performance.

Very high growth rates of >50% are unsustainable.

2

Profitability

NPM >8%

6%

Look for companies with sustained operating & net profit margins over the years

3

Tax payout

>30%

30%

Tax rate should be near general corporate tax rate unless some specific tax incentives are applicable to the company.

4

Interest coverage

>3

5.64

5

Debt to Equity ratio

< 0.5

0.28

Look for companies with D/E ratio of as low as possible. Preferably zero debt

6

Current ratio

>1.25

1.53

7

Cash flow

CFO > 0

YES 

Positive CFO is necessary.

It’s great if CFO meets the outflow for CFI and CFF

8

Cumulative PAT vs. CFO

cPAT ~ cCFO

YES

Cumulative PAT and CFO are similar for last 10 years

VALUATION ANALYSIS

1

P/E ratio

< 10

9.45

Such companies provide good margin of safety

2

P/E to Growth ratio (PEG ratio)

< 1

0.25

3Y EPS GROWTH CAGR = 11%, PE=14, PEG=1.2

3

Earnings Yield (EY)

> 10 year G-Sec yield

10.58

EY should be greater than long term government bond yields or bank fixed deposit interest rates

4

P/B ratio

< 1

1.69

However, I find P/B ratio irrelevant for sectors other than financial services

5

Price to Sales ratio (P/S ratio)

< 1.5

0.6

James O’Shaughnessy: Buy if P/S ratio is < 1.5 and sell if >3

6

Dividend Yield (DY)

> 0%

1.47%

Higher the better.

DY of >5% is very attractive. However, do not focus a lot on DY for companies in fast growth phase

BUSINESS & INDUSTRY ANALYSIS

1

Comparison with industry peers

Sales growth > peers

Yes

The Company must show sales growth higher than peers. If its sales growth is similar to peers, then there is no Moat

2

Increase in production capacity and sales volume

Production capacity & sales volume CAGR ~ Sales CAGR

Yes.

Company has implemented a Rs 38.69 cr production

debottlenecking programme,

which will increase

production from 99,000 TPA

to 116,000 TPA,

Company must have shown increased market penetration by selling higher volumes of its product/service

3

Conversion of sales growth into profits

Profit CAGR ~ Sales CAGR

Yes 

A Moat would result in increasing profits with increasing sales. Otherwise, sales growth is only a result of unnecessary expansion or aggressive marketing push, which would erode value in long term

4

Conversion of profits into cash

cPAT ~ cCFO

Yes

If cPAT >> cCFO, then either the profits are fictitious or the company is selling to any John Doe for higher sales without having the ability to collect money from them

5

Creation of value for shareholders from the profits retained

Increase in MCap in last 10 yrs. > Retained profits in last 10 yrs.

Yes (2.4x)

Otherwise, company is destroying wealth of shareholders

MANAGEMENT ANALYSIS

A) Subjective parameters

1

Background check of promoters & directors

Web search

Ruchira Papers Ltd went into

production in 1983, promoted by

Umesh Chander Garg, Jatinder

Singh and Subhash Chander

Garg. Jatinder Singh addresses

finance, administration and

procurement, Subhash Chander

Garg looks after taxation,

marketing and sales while Umesh

Chander Garg manages the

production, maintenance and

technical aspects.

There should not be any information questioning the integrity of promoters & directors

2

Management succession plans

Good succession plan should be in place

N/A

Salary being paid to potential successors should be in line with their experience

B) Objective Parameters

3

Salary of promoters vs. net profits

No salary increase with declining profits/losses

Not able to find

promoter should not have a history of seeking increase in remuneration when the profits of the company declined in past

4

Project execution skills

Green/brownfield project execution

N/A

Company should have shown good project execution skills with cost and time overruns.

Exclude capacity increase by mergers & acquisitions.

5

Consistent increase in dividend payments

Dividend CAGR > 0

Consistent

Dividends should be increasing with increase in profits of the company

6

Promoter shareholding

> 51%

60.32%

Higher the better

7

Promoter buying the shares

Insider buying ++

Promoters buying consistent

If promoter of a company buys its shares, investors should buy too

8

FII shareholding

~ 0%

0

the lower the better

OTHER BUSINESS PARAMETERS

1

Product diversification

Pure play

Paper

Company should be either a pure play (only one business segment) or related products. Pure play model ensures that the management is specialized in what they are doing. 

Entirely different unrelated products/services are a strict NO. An investor should rather buy stocks of different companies if she wants such diversification.

2

Govt. influence

No govt. interference in profit making

Nothing So Far

No cap on profit returns or pricing of product.

Margin of Safety

MoS in Purchase Price

Earnings Yield (EY)

EY > 10 Yr G-Sec Yield

Yes

Higher the EY than 10 Yr G-Sec Yield, the better

MoS in Business Model

Self-Sustainable Growth Rate (SSGR)

SSGR > Achieved Sales Growth Rate

2%

Higher the SSGR than achieved Sales Growth, the better

Free Cash Flow (FCF)

FCF/CFO >> 0

21% Over 10y

Higher the FCF as proportion of CFO, the better

Credit Rating

1

Credit Rating History

BBB- & above

The Company has been upgraded from CARE BBB- (TRIPLE B -) to CARE BBB (TRIPLE B) assigned to Long term facilities and CARE BBB/CARE A3+(TRIPLE B/ A THREE PLUS) assigned to short term facilities of the Company.

Current credit rating should be minimum BBB-

Credit rating should have been improving over the years

My Investing rationale:

  • Increase in promoter stake by 6% in last 5 years.
  • Cheap Valuations
  • E-commerce Boom
  • Textile Boom
  • Manufacturing sector getting a boost
  • Dividend Yield acting as a cushion
  • Free cash Flows

Please provide your inputs.

Thank you,

Best Regards,

Avinash Landge

 

Author’s Response

Dear Avinash,

Thanks for your feedback & appreciation! I am happy that you found the articles useful!

Many thanks for sharing your analysis of Ruchira Papers Ltd with the readers and the author. I appreciate the time & effort put in by you in the analysis. It gives a pleasure to see that you are using the Screener.in compatible stock analysis excel template available at our website.

Let us analyse the financial performance of Ruchira Papers Ltd over last 10 years.

 

Financial Analysis of Ruchira Papers Ltd:

Equity Research Report Analysis of Ruchira Papers Ltd, a Himachal Pradesh India based paper manufacturing company dealing in writing & printing paper and kraft paper packaging paper

Ruchira Papers Ltd had been growing its sales at a good pace of 19% over last 10 years (FY2007-16). However, as the size of the company is increasing the pace of sales is going down year on year. The sales growth has toned down to 12% in last 7 years (FY2009-16) and further down to 7% in last 5 years (FY2011-16).

As per the company, it has undertaken debottlenecking of its existing plant capacity towards the end of FY2016, which might lead to the growth rate picking up in future. However, it remains to be seen to what extent the company would be able to utilize the increased capacity. As per the H1-FY2017 results declared by Ruchira Papers Ltd, it has achieved a sales growth of about 9% over the previous year.

A look at the profitability trend of Ruchira Papers Ltd would indicate that both the operating profitability margin (OPM) and net profit margin (NPM) have been fluctuating widely during last 10 years (FY2007-16). Operating profit margins (OPM) have been varying from 12-9-17-11-14% over the years and similarly, net profit margins (NPM) have been fluctuating from -2% to 6% over the years.

Such fluctuating margins are characteristic of companies, which have low bargaining power with their customers. In such businesses, companies find it difficult to pass on the increase in raw material costs to their customers quickly and thus take a hit on their profitability margins.

Also Read: How to do Financial Analysis of a Company

Ruchira Papers Ltd has proudly communicated in its FY2016 annual report that they have been able to maintain their operating margins in the business despite the fact that in paper industry it is extremely difficult to pass on the increase in raw material to customers. See pg. no. 4 of the FY2016 annual report:

 

Equity Research Report Analysis of Ruchira Papers Ltd, a Himachal Pradesh India based paper manufacturing company dealing in writing & printing paper and kraft paper packaging paper

If an investor analyses the comparative performance of Ruchira Papers Ltd with its peers (JK Paper, Tamil Nadu Newsprint, Emami Paper and West Coast Paper), then the investor realizes that neither Ruchira Papers Ltd seems to have been able to maintain its profitability margins nor it is the most cost competitive player in the industry:

Equity Research Report Analysis of Ruchira Papers Ltd, a Himachal Pradesh India based paper manufacturing company dealing in writing & printing paper and kraft paper packaging paper

The above chart clearly depicts that the operating margins of Ruchira Papers Ltd have been fluctuating more or less in the same manner as the margins of most of its peers like JK Paper, West Coast Paper, Emami Paper etc. The only paper manufacturer to stand out in terms of stable margin out of the five players is Tamil Nadu Newsprint & Paper Ltd, which without doubt has the most stable as well as the highest operating profitability margins out of the five key players.

The above comparative analysis also indicates that the Ruchira Papers Ltd is not the most competitive paper producer in the country. Many other players e.g. Tamil Nadu Newsprint & Paper Ltd are more cost competitive than Ruchira Papers Ltd.

Read: How to do Business Analysis of Companies to Find out Competitive Advantage

Over the years, the tax payout ratio of Ruchira Papers Ltd has been consistently above 30%. However, as per the company, it has been availing multiple tax benefits including income tax benefits due to the geographical location of its factory. Ruchira Papers Ltd has provided details of the various incentives available to the company at pg. 5, FY2016 annual report.

Equity Research Report Analysis of Ruchira Papers Ltd, a Himachal Pradesh India based paper manufacturing company dealing in writing & printing paper and kraft paper packaging paper

An investor can derive the following conclusions from the above information:

  1. The income tax payout rate is expected to be lower than standard corporate tax rate due to the 30% income tax benefit available to the company.
  2. The profitability of the company will take a hit when the excise tax exemption & income tax exemption end after FY2018
  3. The company is not the most cost competitive despite availing lower power costs (due to incentives as well as co-generation plant) as well as excise duty benefits.

 

Operating Efficiency Analysis of Ruchira Papers Ltd:

Operating efficiency parameters of Ruchira Papers Ltd reflect that it has been able to improve its net fixed assets turnover (NFAT) over the years. NFAT has improved from 1.09 in FY2010 to 2.26 in FY2016.

Inventory turnover ratio (ITR) of Ruchira Papers Ltd has been almost stable at about 7-8 times over last 10 years.

Receivables days have been fluctuating wildly over the years. It has shown sharp improvement in FY2008, when receivables days improved from 50 days to 35 days. However, since then the receivables days deteriorated to 49 days in FY2014 and have now improved to 34 days in FY2016.

Ruchira Papers Ltd has proudly claimed in its FY2016 annual report (pg. 9) that it has been performing better than its peer in terms of receivables days and inventory management.

Equity Research Report Analysis of Ruchira Papers Ltd, a Himachal Pradesh India based paper manufacturing company dealing in writing & printing paper and kraft paper packaging paper

However, when we compare the receivables days of Ruchira Papers Ltd with its other peers (JK Paper, Tamil Nadu Newsprint, Emami Paper and West Coast Paper), then we come to know that other peers like JK Paper and West Coast Paper are performing better than Ruchira Papers Ltd. However, among the peers compared, Ruchira Papers Ltd along with JK Paper has the best inventory management.

Equity Research Report Analysis of Ruchira Papers Ltd, a Himachal Pradesh India based paper manufacturing company dealing in writing & printing paper and kraft paper packaging paper

Also Read: 5 Simple Steps to Analyse Operating Performance of Companies

When we analyse the cumulative profits and cash flow data for 10 years (FY2007-16)), then we realize that Ruchira Papers Ltd has been able to convert its profits in to cash flow from operations. Cumulative PAT during FY2007-16 is ₹81 cr. whereas the cumulative cash flow from operations (CFO) over the similar period has been ₹251 cr. Conversion of profits into cash is a good sign for the investors.

 

Margin of Safety in the Business of Ruchira Papers Ltd:

Free Cash Flow Analysis of Ruchira Papers Ltd:

Over last 10 years (FY2007-16), Ruchira Papers Ltd has done a capital expenditure (capex) of ₹199 cr. which was primarily concentrated in FY2008 & FY2009 (₹141 cr.). Ruchira Papers Ltd relied primarily on debt to meet this capex, which led to the debt levels rising to ₹141 cr. In FY2009. However, over the years the company has refrained from doing such debt funded capex and has accordingly used the cash generated from operations for reduction of debt.

As a result, the total debt of Ruchira Papers Ltd has reduced from ₹141cr in FY2009 to ₹73 cr in FY2016. However, the prevalence of debt during the last decade has eaten up almost ₹110 cr from the funds generated by the company during this period, assuming 11.75% rate of interest, which is company is paying on its current debt taken from Punjab National Bank and Oriental Bank of Commerce (FY2016 annual report, pg. 12).

Equity Research Report Analysis of Ruchira Papers Ltd, a Himachal Pradesh India based paper manufacturing company dealing in writing & printing paper and kraft paper packaging paper

However, despite significant costs of the debt incurred by Ruchira Papers Ltd, it has been able to successfully reduce its debt and as a result, the company has witnessed improvement in its credit rating by the credit rating agency CARE Ltd in FY2016:

Equity Research Report Analysis of Ruchira Papers Ltd, a Himachal Pradesh India based paper manufacturing company dealing in writing & printing paper and kraft paper packaging paper

Using the funds generated from operations to reduce debt is a good sign of management. However, if an investor analyses the FY2016 annual report of Ruchira Papers Ltd, then she realizes that there are many aspect/decisions of the management of the company, which require deeper assessment.

 

Additional aspects and annual report analysis of Ruchira Papers Ltd:

1) Salary of MD & whole time directors exceeds the statutory ceiling:

As per the annual report for FY2016, Ruchira Papers Ltd has paid a salary of ₹3.13 cr to its executive directors including managing director & whole time directors, which is 16% of its net profit after tax of ₹19.5 cr in FY2016.

Equity Research Report Analysis of Ruchira Papers Ltd, a Himachal Pradesh India based paper manufacturing company dealing in writing & printing paper and kraft paper packaging paper

The company has declared that it does not have adequate profits for payment of managerial remuneration under section 197 or schedule 5 of companies act 2013. At page 34 of the FY2016 annual report:

“During the Financial Year ended 31st March 2016, the Company did not have adequate profits for payment of managerial remuneration under section 197 and Schedule V of the Companies Act, 2013. The profitability has increased during the year but the remuneration proposed does not fall under the limits as specified under section 197 resulted inadequacy of profits during the F.Y. 2015-16. “

As per the act:

“A director who is in whole time employment of the company or a managing director may be paid remuneration either by way of a monthly payment or at a specified percentage of net profits of the company or partly by one and partly by the other. Such remuneration cannot exceed 5 % of the net profits of the company, except with the approval of the Central Government in the case of one director and 10 % for all such directors.”

An investor should check with the company whether it has obtained the approval of the central government for paying the stated remuneration to its executive directors.

Read: Steps to Assess Management Quality before Buying Stocks (A) (Moneylife SessionPart-2)

2) The senior vice president in charge of corporate social responsibility spending (Sr. VP-CSR), Ms. Praveen Garg, who is wife of founder promoter of Ruchira Papers Ltd, is being paid a salary of ₹36.2 lakh, whereas the total CSR spending done by the company in FY2016 is ₹7.47 lakh.

An investor may analyse different sections of the annual report to verify these expenses:

Equity Research Report Analysis of Ruchira Papers Ltd, a Himachal Pradesh India based paper manufacturing company dealing in writing & printing paper and kraft paper packaging paper

Equity Research Report Analysis of Ruchira Papers Ltd, a Himachal Pradesh India based paper manufacturing company dealing in writing & printing paper and kraft paper packaging paper

3) The above image also indicates the strange fact that all the eight relatives of founder promoters, are being paid the same salary of ₹36.2 lakh by the company irrespective of their experience (7 to 23 years) or qualifications or age (29 to 69 years).

It hardly seems a coincidence as in professionally run organizations, the remunerations of different persons depend on their merit and are usually different for different employees.

Moreover, another strange finding that an investor would notice that all the eight relatives of founder promoters got the same hike in remuneration in the current year over the previous year. Annual report FY2016, page 100:

Equity Research Report Analysis of Ruchira Papers Ltd, a Himachal Pradesh India based paper manufacturing company dealing in writing & printing paper and kraft paper packaging paper

It is very strange performance evaluation by the board/human resource department of Ruchira Papers Ltd that all the eight relatives have added exactly equal value to the company that all the eight of them have received equal increments in remuneration.

By a far fledged leap of logic, it seems that the founder promoters are allocating equal allowances to the relatives via the company, which cumulatively amounts to ₹2.9 cr per year (₹36.2 lakh * 8), which is about 15% of net profits of the company.

An investor should explore further about the value being added to the company by the eight relatives of the founder promoters.

 

4) Related party transactions:

As per the annual report for the company for FY2016, page 32, Ruchira Papers Ltd has been dealing with the entities, which are held by relatives of founder promoters: Mr. Umesh Chander Garg and Mr. Jatinder Singh.

Equity Research Report Analysis of Ruchira Papers Ltd, a Himachal Pradesh India based paper manufacturing company dealing in writing & printing paper and kraft paper packaging paper

The extent of the sales to these entities has been mentioned as ₹95 cr, which is about 25% of the total sales of Ruchira Papers Ltd. An investor should further analyse that whether these transactions are at arm’s length despite being stated so in the annual report.

Read: Why Management Assessment is the Most Critical Factor in Stock Investing?

An investor should always be vary of increasing sales/transaction of the companies with promoters and their related parties as historically, such transactions have very high probability of benefiting the said related parties than the minority shareholders. Therefore, it is advised that the investor should explore more about these transactions through various sources and then make her final opinion.

 

Margin of Safety in the market price of Ruchira Papers Ltd:

Ruchira Papers Ltd is currently available at a P/E ratio of about 9.4, which does provide a margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.

Read 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

Read: How to earn High Returns at Low Risk – Invest in Low P/E Stocks

 

Conclusion:

Overall, Ruchira Papers Ltd seems to be a company, which has been growing at a good pace in the past but is currently witnessing a slowdown in growth. The management has recently undertaken capacity expansion by debottlenecking, which might contribute to the growth in future. The company has been facing fluctuating operating margins in line with changing raw material prices, which is in contrast to the claims made by the company in its shareholders’ communications like annual report.

The company has utilized its funds generated from operations in the past to reduce debt and give dividends to shareholders. However, multiple aspects of the management decisions like high salary to executive directors, equal allowances to relatives of founder promoters and significant amount sales transactions with entities of relatives of promoters indicate that an investor should analyse the management aspect of Ruchira Papers Ltd in further depth before taking the final decision of putting her hard earned money in the stock.

These are my views about Ruchira Papers Ltd. However, you should do your own analysis before taking any investment related decision about Ruchira Papers Ltd.

You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company

An investor should keep a close watch on the operating efficiency and the debt levels of Ruchira Papers Ltd along with its operating margins in future.

Also Read:  How to Monitor Stocks in your Portfolio

Hope it helps!

Regards,

P.S.

 

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

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