In our previous article we discussed Tamil Nadu Newsprint (TNPL) and JK Paper's (JKP) business models, innovation and other strategies; and we reviewed their product offering as well as their approach to raw material management We also observed that over the past five years TNPL had added production capacities whereas JKP had not.

The Paper industry is highly capital intensive and it is imperative that companies in that space support their strategies and operations with strong balance sheets. .

In this second article of this series, we compare the financials of TNPL and JKP.

Revenue growth and pattern

Over the past 5 years TNPL has clocked a slightly worse CAGR growth rate of 8% compared to 10% for TNPL. This was despite the fact that during these past 5 years, TNPL's capacity increase by 75% and JKP did not add any production capacity. However, TNPL's revenue growth has been mostly stable and close to 10%, but JKP's growth has been very volatile.

Operating Profit Margin

TNPL's raw material costs as a percentage of sales have reduced from 22% in 2005 to 15% in 2011. TNPL uses bagasse as raw material and has managed that resource relatively well. During the same six year period, JKP's raw material costs have increased significantly from 26% of sales in 2005, and now comprise nearly 33% of sales. However, JKP's primary raw material is wood which is becoming more difficult to source resulting in increasing costs to JKP.

However, even with these raw material dynamics, TNPL and JKP's operating performance mirrors their revenue growth and operating profits are relatively similar. Over the past 5 years, TNPL's 's operating profits grew at a CAGR of 13% and JKP's close to that at 14%.

PAT - Net profit margin

At the PAT level, the picture changes dramatically.

Over the same 5 year period, TNPL's PAT CAGR is only 13%, relative to JKP's PAT CAGR of 25%.

This is a result of TNPL adding production capacity and using large amounts of capital which increased debt by 383% during that time.

TNPL's debt to equity has increased from 0.59 times to 1.62 times in the past 5 years thereby resulting in higher interest expenses. However, interest costs as a percentage of debt have come down from 7% to 3%. (This number is so low because TNPL's debt consists of both Indian as well as foreign borrowings).

For JKP, the debt to equity ratio has gone down from 1.38 times to 0.92 times in the same period. Interest costs have also come down but interest costs as a percentage of debt are up from 7% to10%.

Financials: TNPL Vs JKP over past 5 years

Factor	Tamil Nadu Newsprint Limited	J K Paper
Strategy
Growth strategy	Organic growth through capacity additions	Focus on value added products
Products	newsprint, writing paper, paper for printing, industrial paper, value added paper	different types of value added paper
Raw material supply	Procures bagasse from sugar mills in exchange for steam	Has a tie-up with farmers under farm forestry programme to procure wood
Revenues
Net Revenues in 2011	Rs 11.84 bn	Rs 12.30 bn
Revenue CAGR- 5 years	8%	10%
Revenue Mix	Exports make up 20% of revenues	More than 95% revenues from value added products
Last 5 yrs' Average Profit Margins
Operating	13%	14%
Net Profit	13%	25%
Debt to Equity (last 5 years average)	1.27	1.52

From our analysis so far, we conclude that TNPL's strengths reflected in its financial results have been its use of bagasse as raw material, as well as its innovative raw material agreements and production processes. JK Paper which has focused on value added products has done slightly better in terms of revenue growth, but much more strongly in net profit performance. This is because JKP t did not need to add capacity and so it did not increase debt. However, the increasing scarcity of wood resulting in escalating raw material costs is a looming concern for JKP that will dent its profits.

We have looked at the strategies and operations of these two companies, and now have an understanding of their overall financial performance.

In our next and final article of this series, we will conduct a careful study of the valuations of these two companies. This will give us better insight into the investment prospects of both TNPL and JKP.


By Equitymaster - India's leading 'independent' equity research initiative. Trusted by over a million members all over the world, Equitymaster is known for its well-researched, unbiased and honest opinions on the Indian stock markets.

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