I had written an article about NR Agarwal Industries Ltd(NRAIL) in October 2018. Please read it before to understand this blog better. Given the ban on waste paper in China, the raw material cost for the company was expected to go down, thus expanding profits. It did go down significantly. But if you look at the entire year’s raw material as a percentage of sales, the drop in waste paper(raw material) cost for the company was just at 0.6% compared to last year. I will try to explain the factors in the blog “N R Agarwal Industries Ltd(NRAIL)- Q1FY20 result analysis”
Let me first cover what happened in the FY19 and later in the blog I will be cover pointers related to the quarterly results.
N R Agarwal Industries Ltd(NRAIL)- Q1FY20 result analysis
You can also read my blog on Indian Paper Industry.
Based on the theoretical factors prevailing around sept-oct 2018, I was of the opinion that paper manufacturers using waste paper as raw material will benefit the most. But, it was the second category that gained the most i.e companies using wood pulp with captive forestry eg JK Paper.
There has been significant surge in wood pulp prices with China moving towards paper manufacturing via pulp. Those companies importing it are at an disadvantageous situation. You can read more here.
Not sure what went wrong for the waste paper companies. But for the wood pulp companies, they were benefited by higher product prices backed by Anti dumping duty on writing & printing papers. Although NRAIL also manufacturers writing & printing papers but the paper quality made via wood pulp is always better, getting a premium.
Fig 1: Companies being benefited due to change in demand-supply scenario
N R Agarwal Industries Ltd(NRAIL)- Q1FY20 result analysis
N R Agarwal Industries Ltd(NRAIL)- FY19 result analysis
NR Agarwal Industries Ltd- Annual financial analysis
As mentioned earlier that NRAIL was expected to be the biggest beneficiaries of drop-in waster paper prices. But instead, those companies that use the wood pulp as raw material benefited more even with surging pulp prices.
In order to check that if NR Agarwal Industries was the outlier in terms of gross profit but all other companies using waste paper as raw material such as Malu paper, Rama Paper mills etc were in the same boat.
Usually, mills located in western India make paper using waste paper because of the access to ports where the waste papers are imported. Mills in eastern & southern India uses wood pulp mainly due to captive forests or easy access to wood pulp.
NR Agarwal Industries Ltd-Capacity utilization
The company was in the process of converting its Unit II(Vapi): Newsprint plant to Writing & Printing paper unit. But they had second thoughts due to the surge in prices of newsprint. The company finally decided to continue it’s earlier plan of converting to W&P paper as the high prices of newsprint were not sustainable.
Overall, the realization per unit increased. For NRAIL, the realization of duplex boards increased by 6.53% whereas that of W&P paper increased by 14.56% for FY19.
These 2 segments equally contribute to the total revenue of the company. In case of plastic ban, the packaging segment(duplex board) will be a big beneficiary.
As of now, the entire business of the company is B2B focused. The company launched its copier product(First B2C product) in May 2019.
Since, with the single-use plastic ban in news recently, I just wanted to check on what happened to their plan to get into Kraft paper(used in making paper packaging) which they announced in 2017-18. But, there was no mention of the project in the 2018-19 annual report. Have mailed the company to find the status of the same.
N R Agarwal Industries Ltd(NRAIL)- Q1FY20 result analysis
N R Agarwal Industries Ltd(NRAIL)- Q1FY20 result analysis
Fig 4. N R Agarwal Industries Ltd(NRAIL)- Q1FY20 financial analysis
As you can see in the image above the company saw some gross margin benefits in Q3FY19 & Q4FY19 but the cost of raw material increased in Q4FY19 & Q1FY20 on a year-on-year basis.
Comparing to companies which make paper using wood pulp(eg JK Paper) the expansion in margin for them continued.
Other than gross margin, the employee cost has seen a surge. As explained in fig 4, the jump of 73% in employee cost in Q4FY19 was due to annual commission paid to promoters. This has come down in Q1FY20 but still at a higher level.
With respect to company not being able to take advantage of drop in waste paper prices seems to be a mystery as of now.
Further reading: