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Q4FY11 Conference Call Transcript

18 May, 2011

Moderator:
Ladies and gentlemen good day and welcome to the JK Paper Q4FY11 Conference Call hosted by Emkay Global. As a reminder all participants will be in the listen-only mode and there would be an opportunity for you to ask questions at the end of todays presentation. If you should need any assistance during this conference call please signal an operator by pressing * and then 0 on your touchtone telephone. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Ajay Parmar, Head of Research from Emkay Global, thank you and over to you Mr. Parmar.

Ajay Parmar:
Thank you Vivian. We would like to welcome Mr. V. Kumaraswamy, CFO and Mr. Ashok Gupta, General Manager Finance of JK Paper Ltd. I want to thank the management for giving us the opportunity to host this call. I would now like to handover the call to Mr. Kumaraswamy.

V. Kumaraswamy:
Thank you Mr. Parmar for hosting this . Yeah I will just run through the yearly figures first and then the quarterly one. At the end of the year, we ended up with about 12% increase in revenues which is on the back of both volume and price increases.. This quarter was a little flattish in terms of the operating results for which I will explain a couple of things . At the net sales and other income level we were 316 cr vis--vis 295 cr last year, up by around 7% and the EBITDA was 62 cr which is about 3% yoy and profit after tax was 23 cr vis--vis 27 cr, a drop of 15%. We shut our plant for nearly 12 days and lost about 2400-2500 tons of production. A contribution loss on that is almost about 4 crores during which the assets which have been written off on top of it, we have also had one-time write offs of around 2 or 3 crores in the other expenditure line. Here also as you know the FCCB interest of around 7.7 crores, a one time redemption premium paid during the year also has been taken. The provision for deferred tax last year same quarter was about reversible tax credit and this time is about 3 crores . That has made a difference of almost 11 crores vis --vis last year , another 4 crores of board last year plus this FCCB interest of which we are talking about in the quarter 2 crores. The difference between last year same and this year same s and a couple of other things the board has done is they have managed to retain the funds for the project. We have also made the progress on the project without most of the machinery and bulk of the financials have also been tied up. The rights to issue documents are in process, half the documents for debt also has been signed up the other half will be hopefully signed within the next. We are well on our course. During the quarter of course one significant development was the expansion debottlenecking.. That is all from me and i open the line to the other participants now. Thank you Mr. Parmar, I am through with my opening remark.

Moderator:
Sir would you like to take question right now?

V. Kumaraswamy:
Yeah I can take questions.

Moderator:
Sure. We do have question, it is from the line of Vineet Maloo from Birla Sunlife, please go ahead.

Question and Answer Session

Vineet Maloo:
Sir just wanted to know, could you give me your different segment wise volume for this quarter and realization?

V. Kumaraswamy:
Actually I will just give the sales numbers of uncoated paper which in our case is essentially Copier only and nothing much is there these days or 34,000 ton. Coated volumes are about 13,000. Packaging board was 16,800 because we used some pulp consumed which is about 4500 tons . We also sold about 2400 tons of outsource paper which is again copier and coated paper only. So total about 70,904 was the total volume during the quarter. You want it for the year also? Emkay Research | 18 May, 2011

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Vineet Maloo:
Yeah that will be useful.

V. Kumaraswamy:
Uncoated was 131,500, coated was 53,200, packaging board was 75,500.

Vineet Maloo:
Pulp?

V. Kumaraswamy:
27500 and the outsource was about 7000 tons . Total about 294,000.

Vineet Maloo:
And the realization also if you could?

V. Kumaraswamy:
The realization for what the year as a whole?

Vineet Maloo:
For this quarter.

V. Kumaraswamy:
I have the 12 months figure, if you can do with this and three months I can always e-mail it to you.

Vineet Maloo:
Sure sir, give me 12 months right now, I will take the quarter separately from you.

V. Kumaraswamy:
It was about 44,000, coated was 45,700, packaging board was 48,600.

Vineet Maloo:
Okay.

V. Kumaraswamy:
Okay this is the year as a whole. I will ask somebody to pull the last quarter by the time we come to the next question we will get it for you.

Vineet Maloo:
Sure. Sir going forward what is the market looking like in terms of various segments. Where do you see maximum traction in terms of possible price increase or something?

V. Kumaraswamy:
See market is very buoyant in most sectors where we quoted with Copier, on Maplito and packaging board. There is growth and growth supported by fundamental economic out of Maplitho because of higher quantum of book printing and you know Sarva Siksha Abhigyan operating which has emphasis on education etc. Copier when the convergence in printing more and more bills being printed in the credit card statements all those. Coated because of glossiness better quality paper and so people will switch over from uncoated Maplito into that. Packing board because of better quality printing which is by FMCG, pharma, etc.

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Vineet Maloo:
Sir what do you think will be the market growth segment in terms of percentage year-on-year in FY12?

V. Kumaraswamy:
Now market is growing around 8.8%. Independent estimate show that Copier estimate is going about 15, coated by around 1213, packaging board by about 18-19%.

Vineet Maloo:
Packaging board 18-19%.

V. Kumaraswamy:
Where higher-end and value added packaging board. The lower-end, it is may be growing about 7-8% on way back. Actually it is moving volume to higher-end packaging board because people are shifting from lower-end and get back both the higher-end and folding box board.

Vineet Maloo:
Sir this you are telling me in terms of volume right? This growth?

V. Kumaraswamy:
That is right.

Vineet Maloo:
So industry is basically expanding, growth by this much. It is not value growth.

V. Kumaraswamy:
This is not value growth. This is only the quantity growth I am talking about.

Vineet Maloo:
Right.

V. Kumaraswamy:
Value growth will be even more.

Vineet Maloo:
Right understood. Sir just coming to margins in terms of expense items you know what is outlook going forward how are they moving?

V. Kumaraswamy:
There are three basic things which are moving up one is raw material, wood in our case and is moving up smartly. Its been a good growth in the last about 12-18 months in their price. Secondly the coal, as you know Coal India has put up, so its prices steeply during February last FY11. There are some chemicals which are doing very well now especially this perenol petroleum based. These are the three things which are moving up smartly and as it stands today. Demand was in paper industry such and the capacity utilization of most people is such as these cost increases are getting absorbed. So I think that is the status affairs.

Vineet Maloo:
Okay. Sir for pulp we have our 100% capitive units right?

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V. Kumaraswamy:
No pulp we are about 83% self sufficient, board there is special quality of pulp called BCTMP not manufactured in India we have to get it from this countries which are towards to the pole either Nordic countries , Astonia, Finland, Canada or New Zealand that we have to import there is no choice, balance we have our surplus pulp from the other mills, I mean JK in which we use in our board.

Vineet Maloo:
Okay, sir how much what is the proportion of this BCTMP that we have to import?

V. Kumaraswamy:
We approximately consume about 35-40% of the pulp consumption within board. Board consumes almost let say 0.9 tons of pulp producing 75, we would approximately require about 67,000-68,000 tons of pulp. Take about 45% on that about 3032,000 is what we consume of.

Vineet Maloo:
So only on board we need this, right?

V. Kumaraswamy:
Both there is a small quantity of hard wood pulp we import but that quantity is slowly reducing.

Vineet Maloo:
Okay.

V. Kumaraswamy:
Production in-house.

Vineet Maloo:
Right understood and so on coal side I mean the prices have increased but the Coal India affected only at the end of February. So we wouldnt have seen the impact come through the P&L right.

V. Kumaraswamy:
Want to appreciate one or two things better not to be scared when I say 30% and 40%. 40% applies to only the base price.

Vineet Maloo:
Base price yeah.

V. Kumaraswamy:
Base price in our case say 700. As you know the delivered cost of coal factory is about 15,000 which means less than 50% is paid for the coal. This is one is for freight and on that there is no increase. Like in our CPM said price again is 700; the transport cost is under 2600-2700 so on that there is no cost increase.

Vineet Maloo:
Sorry on what?

V. Kumaraswamy:
Approximately translate if price of my paper by around to Rs.450 I will be able to recover the cost increase due to coal.

Vineet Maloo:
So basic with the effective cost price increase for you would be something like 12-15% only in terms of per ton of coal.

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V. Kumaraswamy:
Again what happens in coal they are not supplying the whole thing, in one case we are getting only 50%, the other case we are getting only about 70% or so. Balance we were dependent on either imported coal or domestically sold coal, that again there is no increase. In fact on this, on one location it is about 12% as smaller the location unit CPM, which about is 6-7%.

Vineet Maloo:
Okay so in an overall mix how much would be this coal that we are using?

V. Kumaraswamy:
Coal we approximately use about 4 lakh ton with the linkage coal that we use approximately about 24000-25000 ton.

Vineet Maloo:
And balance would come from the e-auction?

V. Kumaraswamy:
Yes from open market or e-auction just like that.

Vineet Maloo:
Sir after Coal India increased its prices . Have you seen e-auction prices also going up?

V. Kumaraswamy:
E-auction was an open market price anyway that has nothing got to do with import parity rather than Coal India pricing as you know in that case.

Vineet Maloo:
And sir lastly on chemical side which specific chemicals you mentioned is seeing.

V. Kumaraswamy:
Hydrogen peroxide, perenol , we use som e chemicals and color chemicals based on petroleum products about 5, 6 of them are small in this one performance or specialty chemicals manufactured within our own factory or by outsiders . These also we have seen, even liquid chlorine has increased.

Vineet Maloo:
Right sir, thank you very much.

V. Kumaraswamy:
Thank you.

V. Kumaraswamy:
Replying to Mr. Vineets previous question. The uncoated realization is last quarter was 45,000 and coated was 46,300, and packaging board was 50,700. I will update them on the board, this new project as far as funding is concerned 1660 crores we have already completed its FCCB at 65 with the conversion after 3-1/2 years, documents have been signed off, we have got the RBI permission as well, going ahead with the FCCBs and all the domestic lenders have already signed off the documents and the foreign lenders rest with the suppliers credit obviously that is tied their supplies had some time to respond but we will done in next 15-20 days . Work has commenced, civil work for paper. Yes, finished off with the project so if participants have any question we can take it.

Ajay Parmar:
Sir, can you please repeat the sales volumes numbers for quarter 4 because there was some disturbance in the line so couldnt hear it.

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V. Kumaraswamy:
Realization I was reading out.

Ajay Parmar:
I got the realization, the sales volume number for quarter 4.

V. Kumaraswamy:
Quarter 4 you wanted?

Ajay Parmar:
Yes sir.

V. Kumaraswamy:
Okay the uncoated is 34,000, coated was 13,100, packaging board was 16,800 unconsumed pulp was 4500, outsourced paper and uncoated is 2400, total is about 20,900 odd 71,000.

Ajay Parmar:
Sir how much total? Sir during the quarter you shut down both your plants for around 10-12 days, right? So how much was the tonnage loss because of that?

V. Kumaraswamy:
We shut down only the packaging board plant for 12 days . It will be around per day we produced about 200 tons there in that machine.

Ajay Parmar:
Okay 200 tons per day?

V. Kumaraswamy:
About 2400-2500 we lost.

Ajay Parmar:
Sir recently JK Paper increased their prices by about 3% I suppose in March?

V. Kumaraswamy:
Yes.

Ajay Parmar:
Do you see any such further price increase in your company?

V. Kumaraswamy:
In fact we took one price increase in February and one in 1st of April. So April, we have just come to it, we are reviewing and let us see what the review pros are. This is all based on market feedback and what are the market demands of players. On this position we are reviewing the situation as of now no call has been taken.

Ajay Parmar:
And sir what do you think of that pulp prices going forward, because they are currently around $700-750. So you see any strengthening of pulp prices going forward, in the next quarter?

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V. Kumaraswamy:
See we do not see any further hardening up from now on. Softening is our reading of the situation.

Ajay Parmar:
So can we see some kind of margin expansion in FY12, given that raw material prices and pulp prices have reached their peak and we do not see any strengthening in them ?

V. Kumaraswamy:
Well I wouldnt want to venture ahead of this one but the demand supply situation is such that demand is growing at a very fast pace and supply whatever has to come in has already come in, I think we were the last one to expand. If situation remains like this and the price increases will more than offset the cost and the margin can expand. This is how much I could say at this stage.

Ajay Parmar:
Okay and sir can you please throw some more light on the expansion plan? And what kind of volume expansion do we see in FY12, from that?

V. Kumaraswamy:
New paper machines which are coming up with new pulp line, they are going to be all together different. They are more efficient, where the pulp mills or energy is surplus, it is little more of chemicals but wood is about two times as expensive as chemicals . So there is lot of efficiencies inbuilt into the system . We have already commenced construction; civil work is on for both paper and pulp. Moreover the cements and civil work has started for the paper machine. I think we are on course to complete the project as planned somewhere in October 2012. And financially tied up the FCCB as you know, tied up on the debt. The issues also are halfway through, we have filed to the SEBI documents and as soon as we have that approval, we will proceed to come through the deal. That is where we are.

Ajay Parmar:
Okay. So that would add around 8-10% volume growth in FY12?

V. Kumaraswamy:
FY12, you may be right. Yes, because of this expansion and rather debottlenecking in board, we may be able to get that kind of volume.

Ajay Parmar:
Okay and in realization do you see any further increase apart from the April thing?

V. Kumaraswamy:
As I said it is based on a monthly review. It all purely depends on what is the cost utilization, what is the price situation in the market, and we may not be able to predict far too much in to the future about these things.

Ajay Parmar:
Okay, thank you sir.

V. Kumaraswamy:
Okay, thank you.

Moderator:
Thank you. We have one follow up question from the line of Vineet Maloo, please go ahead.

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Vineet Maloo:
You said that most of the capacities have already come and you are the last one to expand capacity. So after your capacity comes in there is nothing in the pipeline for next 2-3 years?

V. Kumaraswamy:
But now in the pipeline, we are the last one.

Vineet Maloo:
Okay, so say next to 2-3 years besides you, who else is commissioning and how much is coming up in industry, would you have any idea?

V. Kumaraswamy:
Whatever has been announced so far, whether it is TNPL, BILT or Todays Paper, West Coast, everybody has already started the machine. If somebody decides today, it will take easily about 24-30 months for them to come with it.

Vineet Maloo:
So no one has in project mode right now right, or execution mode?

V. Kumaraswamy:
Not other than us no and ITC I think has that, some expansion in board segment.

Vineet Maloo:
Okay right.

V. Kumaraswamy:
Of course Century is just commenced with board machine but the project is already over now.

Vineet Maloo:
Sir they are also adding some more capacity right? Sir Century?

V. Kumaraswamy:
Century, that is what the board just recently commenced their production on the board machine, the construction is over.

Vineet Maloo:
Okay, where capacity expansion is over. So sir next 2 years, in the industry, what do you think the capacity growth, less than 5% per annum?

V. Kumaraswamy:
If you remove us, I think whatever they are able to squeeze out of the efficiency, etc., that is what will be the growth of, apart from what is already on the table.

Vineet Maloo:
Right. So basically demand-supply gap would actually move in favor of industry, right?

V. Kumaraswamy:
That is our expectation also.

Vineet Maloo:
Thank you very much sir.

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Moderator:
Thank you. The next question is from the line of Aakash Manghani from Girik Capital, please go ahead.

Aakash Manghani:
What would be the total installed capacity in the country as of today?

V. Kumaraswamy:
Total installed capacity is about 11.6 million tons; all players included almost about 635 mills are there.

Aakash Manghani:
Also sir, on the back of recent deals which has taken place, the AP Paper deal, I would like to know your view, is there any increased interest by international players like the likes of Nine Dragons or any other players or do you see that the market opening up further for these international players or any prior strategic tie ups that can take place going forward, what is your sense on that?

V. Kumaraswamy:
Opening up pace, this is the sector which is valuable. The deal is at very attractive valuation that is because India is the fastest growing in the paper sector in the world today. In the percentage growth although is not big in volumes as yet, many of those international people are looking at Indian paper industry very seriously. But as far as any deal is on the table or something I wouldnt know, unless it is announced in the market.

Aakash Manghani:
Sir, I just want to know do you get any feelers from various international players getting in touch?

V. Kumaraswamy:
Going on for the last 2 years

Aakash Manghani:
Okay. Thank you sir

V. Kumaraswamy:
Thank you.

Ajay Parmar:
Thank you. On behalf of Emkay Global, that concludes this conference. Thank you for joining us, you may now disconnect your lines. Thank you very much

V. Kumaraswamy:
Thank you very much Mr. Parmar. Thank you on behalf of the management and thank you all the participants for taking the time out. Thank you.

Moderator:
On behalf of Emkay Global that concludes the conference. You may now disconnect. Thank you.

Note:

1.This document has been edited to improve readability. 2. Blanks in this transcript represent inaudible or incomprehensible words.

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