YASH PAKKA LTD | Value Seeker

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YASH PAKKA LTD.

 

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First amazing (perhaps the only) thing about this company is its re-invented by its new second-generation promotor with new vision and purpose (but still it’s an ordinary commodity type business as of today.)

What is it?

The company has exciting plans on the horizon for new product developments. Here are some of the innovations that are in the pipeline:

  • Create products to replace single use plastic bags
  • Replace polymer-based flexible packaging with compostable options
  • Build and grow the compostable tableware business
  • Reduce water and energy consumption significantly.

Ved Krishna is moving company from pure Paper play to Paper based packaging to replace plastics wherever it’s possible, Listen to his mission and vision in his own words –

Nature based Packaging | Ved Krishna | TEDxPSITKanpur

 

Is it all talk or things are shaping up in reality too?

Yes, they have come up with products too –

Yash Pakka Steps up with three kind of Paper Domains to Serve Food Segment

https://www.youtube.com/watch?time_continue=388&v=QiVSD0CHTkQ&feature=emb_logo

Yash Papers are India’s first, Asia’s second and one of only seven publicly listed B Corps globally. They have pursued B Corp Certification to join a group of values-aligned progressive leaders, be part of a collaborative global community of like-minded businesses, and to help grow the movement in India.

Source https://www.linkedin.com/pulse/yash-papers-story-ground-breaking-b-corp-tharani-prakash/

The amazing thing is not only there is a vision of creating a more sustainable future, but Ved Krishna has also been bold enough to implement a less bureaucratic, more empowering culture in his organization. ( which includes firing himself as CEO of the organization).

NEW episode: @Ved_krish from @yashpapersltd talks about the joys and challenges of organizational self-management in India, creating a fearless culture, and why firing himself as CEO was the best decision he ever made –

link to podcast

After listening to the above podcast, blogs and ted talk, I can say this guy has some purpose, clear vision about where he wants to go and very good clarity on how he is going to do it.

“ Sustainability is arguably the most important macro trend of our time. With growing public pressure, sustainability is now a business imperative for leading companies.

Preferences have shifted significantly over the last couple of years, with research showing that consumers are interested in the sustainability of the products they buy, where they come from and how they are packaged. 92% of respondents in a European-wide survey in 2017 said that packaging is very important to them. This percentage has steadily increased over the years and is particularly evident in the 18-34 age group who are the keenest to make sustainable purchasing decisions. CEO – Mondi Group

This small-cap of Rs 123 Cr Mcap uses SAP and one example of empowering individuals mentioned below –

Source – https://www.linkedin.com/pulse/mango-season-susan-basterfield/

Okay, it’s one thing to make environmentally sustainable products but it’s very hard to make them cost-competitive with existing plastic-based packaging products. Where do they stand in terms of that?

Lets, first understand how this company trying to add value ( whats are its products )

PULP – Commodity

We are a rare company that provides an agri-residue pulp. Our pulp is mostly made of sugar cane waste (bagasse). We provide pulp in both bleached and unbleached varieties. An important aspect of our product is that 95% of the cooking chemicals used to manufacture the pulp are recovered by our conventional chemical recovery cycle making the pulp even more environmentally friendly.

MOULDED PRODUCTS (Using Pulp) – Commodity

All our moulded products are made from Bagasse, the waste fiber left-over after the juice is extracted from sugarcane stalk. Bagasse is a very good fiber for pulp, because of its high tensile strength and good fiber length. What does that mean? Simply put, bagasse pulp makes products lightweight for ease in handling, flexible to protect from damage, and strong to prevent spillage.

We make our own pulp from locally sourced bagasse to ensure the highest quality and safety standards.

Our product range focuses on the food industry — compostable disposables for food service, and egg trays for food storage and transportation.

And they are branding these FOODSERVICE DISPOSABLES as CHUK –

CHUK food service disposables are ideal for a wide range of food service formats – indoor or outdoor dining to take-away. Our product range focuses on the food industry — compostable disposables for food service and delivery.

PAPER – Commodity.

Paper is everywhere… why not make it from an earth-friendly material and process? You need consumer-good wrapping? Or food packaging? How about some pharmaceutical paper products? Our paper can do the work you need AND is good for our planet. Buy paper from us and feel good about it.

Bleached

Unbleached

Colored

Currently, the company makes all its revenue selling Pulp and Paper.

 

Lets first focus more on MOULDED PRODUCTS business as this is something promoters heavily betting on and this could potentially bring in more sustainable growth for the company.

Also Read on FinMedium:  Chemcon IPO Review | Positive & Negative Aspects

Are they low-cost producers?

Commodity type businesses make a lot of sense only when they are the low-cost producers.

Let’s look at plates which are biodegradable  –

Chuk Plates –

Excluding delivery charge – the Chuk plates cost around Rs 4 per plate.

Whereas ECOWARE plates cost around Rs 3/- per plate, There is already 25 % cheaper alternative.

How about the 180 ml Bowl?

Chuk Bowl cost around Rs 4/- per Bowl.

ECOWARE – Costs around just Rs 1.68 per Bowl.

Definitely, these folks are not low-cost producers and ECO AWARE is not listed.

Okay, no point talking about it further, Let’s give it a pass …

Hold on, because Ved seems like a man on a mission, let’s try to explore it more.

These questions are more important for me –

Why aren’t they cost-competitive?

Can they become cost-competitive?

Will they become cost-competitive at 100 % capacity utilization?

Or

Why is ECOWARE more cost-competitive?

https://www.youtube.com/watch?v=xCBC1_bCi2o

EcoWare started around 2008 and they have been doing this from almost 12 years whereas CHUK is 3-year-old product, One of the reasons I could guess could be ECOWARE has figured out all the nuances, optimized their manufacturing processes, innovated and hence have the better foothold in the markets or because they were early starter they may be able to lower their cost by using EOS they have built-in over the 12 years.

Why I am more curious is YASH pakka invested around Rs 63 Cr to buy these machines to make these Chuk products and any fool would do the cost analysis before jumping into this business with this huge CAPEX compared to their size. ( especially when you have just come out of bankruptcy).

Machines they bought –

Haven’t they thought about putting Rs 63 Cr on the line without thinking if they will be able to beat ECOWARE out of the market? I don’t know, it doesn’t look like that as of now.

Chuk sales are stuck around Rs 5-6 Cr quarterly rate and at 25 Cr annual sales and it’s still making loss at net profit level.

As this gentleman puts out Yash Provides Pulp to ECOWARE –

Src – https://forum.valuepickr.com/t/yash-paper-rising-from-ash/9558/79

means YASH PAKKA is not getting enough orders to improve their asset turnover but if they can in the future, they can become more cost-competitive having a backward integrated plant.

Isn’t the market big enough for this stuff?

As of Aug – 2017, Ecoware’s processing capacity is 2.6 tpd with an investment of roughly 20cr. Yash has put up an 11.5 tpd capacity at 55cr CAPEX

Source- https://forum.valuepickr.com/t/yash-paper-rising-from-ash/9558/14

It definitely looks like Yash were too aggressive in putting up such high capacity.

Based on my reading – Ecoware used to do Rs 10 Cr of revenue in 2015 and by 2019 they did around Rs 25 Cr of revenue, That means they have grown @ 25% CAGR.

Yash somehow failed to take away any incremental market share from them but still, Rs 60Cr of CAPEX looks too aggressive given the size of the market today.

When will they be able to run at full capacity?

Well, As it turns out today they are running at full capacity –

Check this link out – https://www.linkedin.com/posts/ved-krishna-54b37625_chuk-is-amazing-for-baking-watch-try-and-ugcPost-6641477548435968000-OCPv

Ohh man how come suddenly?

Exactly, that’s what I am wondering as well, Could it be the CoronaVirus effect?

Sourcing might have moved from China to Local players (I don’t know.)

And there is a huge surge in demand for tissue papers, which are selling like hot cakes across the world (link).

Anything other than this tableware?

The company has been introducing a new product every year –

And recently he has been talking about new products like

  • Flexible packaging – To replace single-use of plastics. (like a non-plastic packaging solution for Maggie )
  • Paper Bags – Strength as high as to replace plastic bags.

To develop these products they did some research tie-up with Swedish company.

Listen to Ved Krishna talking about it – https://youtu.be/QiVSD0CHTkQ

As he mentioned they are not price competitive yet to make it very attractive for flexible packaging companies to replace plastics with this paper based solution but this product holds lots of promise.

It looks like the company is completely re-orienting itself to become a packaging company from a paper company, As evident from the name change from Yash Papers to Yash Pakka.

And the paper upcycle seems to be continuing as he said they are doing about 30% expansion in this as well and expansion in tableware ( means they are running out of capacity here ? I am surprised given what rearview analysis says.)

If all of this is true they should be reporting bumper earnings this year as well.

And they have come up with very high strength paper material which can further replace plastic bags for handling higher weight.

Not sure what the price is and no idea about how markets are going to accept these two products – Flexible packaging and Paper bags.

Ved Krishna mentioned in one of the articles below that by 2020 he is targeting Chuk to be about 50% of sales, which is about Rs.100cr. A plate costs around Rs 5-6, a container around Rs.2-4 and a bowl around Rs. 1-2 per unit. Assuming an average cost price of Rs. 3-4 per piece, to generate 100cr sales, they would need to sell 30cr units in a year, which is about 8 lakh units a day.

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How about their RAW material sourcing?

They have their own integrated paper mills.

Paper units in India are in two categories. The integrated paper mills produce their own pulp from agro/ forest-based raw materials and convert the pulp to paper and paper boards. Then there are secondary processing mills who make pulp from recycled paper.

The integrated paper mills have a capacity ranging from 500 tons per day to 2000 tons per day and a new unit of 1000 tons per day may have a capital investment of 750 to 1000 crores. The possibility of setting up a new integrated paper mill in India is unlikely because of raw material constraints.

This is all good but what about the valuations today?

The company is doing about Rs 255 Cr of sales and Rs 20 Cr of net profits.

Trading around Market Cap: Rs 105.54 Cr, Which is about 1x book value and

3.6x earnings.

Below graph shows, markets are ultimate discounting machine –

In 2015, markets were expecting earnings to grow, the stock was trading at 25 PE multiple, markets were right EPS did grow and looks like today markets are expecting earnings to de- grow as its trading around 3.6x earnings?

Yes, that’s what it seems like. In a way it’s safe as markets have discounted all its future earnings degrowth like it was horribly risky to buy it at 25x earnings when earnings were expected to grow, Earnings did grow by 3.5 to 4x and still stock didn’t beat the FD.

The journey from PE 25 to PE 3.62 – shown below

Okay, Where are we really in terms of the paper business cycle ? after all that’s what makes money for them today?

Correct, it’s a good way to value it in terms of its current businesses generating revenue like Paper and Pulp and see if we can get all these futuristic bets on chuk, flexible packaging for free.

The paper industry has time and again expressed concerns about cheap imports and a surge in inbound shipments.

Source

“In view of excess capacities in some of the large paper manufacturing countries in the world, paper and paperboard are being diverted to India which is arguably the fastest growing paper market in the world. Growth in e-commerce, a wider spread of education and an increase in quality of life is leading to an increase in consumption of paper and paperboard in the country.

However, the demand is being increasingly met by imports,” said A S Mehta, president IPMA.

Currently, India’s paper industry is operating at around 85% of the capacity, which is low for a high capital intensive and continuous process industry like paper. Except for a few companies, most of the sector is stressed (bcoz they are not low-cost producers). According to Central Pulp & Paper Research Institute (CPPRI) data, out of 861 paper mills in the country, only 497 are currently operational (talks about lots of consolidation). This shows the stress in the industry.

Then how come some of the listed paper companies in India showing bumper earnings growth, including Yash Papers ltd?

Chairman’s Speech 28th September 2016 –

There was a down cycle of 5 years from 2011 to 2016, There was no capex (new capacity addition), everyone was in pain and the industry went through de-leveraging.

And import prices of paper also normalized –

How long will this up cycle going to last ?

Why is no one adding new capacity ?

  • Everyone is more cautious this time around (may be learnt it the hard way in very 2010-2011 up cycle)

India imports lots of Paper from China, Indonesia and Korea despite being cost competitive now – This is hilarious shows how cautious indian entrepreneurs have become seeing so many bankruptcies around recently, nobody wants to take risk & lose what they already have (Animal spirit is definitely missing) – Read the hilarious conversation below –

Judging by how pessimistic Entrepreneurs were in 2018, I don’t see this cycle has reached its top. There are still a lot of imports and if we are cost-competitive compared to Chinese I think the upcycle could go on for long.

And, India has become more cost-competitive than China, which is a structural change and expected to remain competitive. link

India’s demand for paper has been growing up and Imports are have coming down –

Also, judging by this large investment – Asia Pulp & Paper Group to set up India’s largest paper mill in Andhra Pradesh

That there is now an opportunity to manufacture in India for India or Export given the low cost of labor here.

Not only MNCs coming here to manufacture, But The domestic players have also started putting plants to Export –

Nikita Papers Investing Rs.180 Cr. to Contemplate the ‘Export Market’ (expected to be commercially operated by October 2019).

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“his high strength kraft paper is mainly used for paper carry bag and we are targeting the China, Dubai and Korea paper market for the export primarily.” Mr. Bansal further explained.”

JK Paper to take up ₹2,100-cr expansion plan

On the other hand, if you see the revenue has been growing consistently and recently it has grown with an increase in margins (which hints about the pricing power companies are enjoying today).

Yash Pakka –

Narration

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Last 4 Quarters

Sales

81

100

109

116

147

172

173

174

199

250

255

(OPM%)

16%

15%

16%

17%

15%

15%

14%

17%

19%

18%

21%

 

JK Papers –

Narration

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Last 4 Quarters

Sales

1,106

1,233

1,330

1,459

1,738

2,160

2,437

2,629

2,844

3,257

3,131

OPM %

22%

21%

12%

11%

8%

12%

16%

20%

22%

27%

29%

 

I don’t know where we are in terms of business cycle, if i am allowed to guess we may not be at the top ( bcoz china’s cost of production has gone up it’s not what it used to be 5- 10 years ago, they have shut down a lot of capacity) and Indian companies have become more efficient, there is a huge market in India itself that our companies can capture and gain market share ( we import a hell lot of paper.) and today due to corona virus issues in China / Korea our paper mills are running out of capacity.

And what happened in the chemical industry has been happening in Paper too – There is a lot of capacity shut down in China and Indian paper mills are exporting to china recently (last couple of years )

Listen to CEO / MD of PG Papers (UK based paper company) talking about their plans about setting up capacity in India and China Import Dynamics –

https://www.youtube.com/watch?v=kxVPLxgfORg

And as far as Yash is concerned PE derating to 3.6x in anticipation of degrowth might be far fetched or at least it does offer some margin of safety.

How about the financial health of the company?

Company is definitely running on tight liquidity –

All the shareholders returns (ROE) are driven by high financial Leverage(Although it’s been coming down. ) –

Related Party Transactions – 

Nature of Relationship: Yash Compostables Limited is a Group Company. Mr. Ved Krishna is a Director in this Company and holding 98.80% of equity share capital of the Company.

Screenshot 2020-03-09 at 1.51.10 PM.png

The company has done a total sale of Rs 10.36 Cr to this company.

Screenshot 2020-03-09 at 2.06.46 PM.png

The Company has sold its Moulded Products of Total Value of Rs.10.36/- crores during the year FY 2018-19. As per policy the interest is charged @15% to the delayed receivables, accordingly the interest receivable for the Outstanding receivables amounted to Rs. 7.81 /- Lakhs during the FY 18-19 as on March 31st, 2019 and receivables from the YCL will be adjusted on FIFO basis.

Screenshot 2020-03-09 at 1.57.49 PM.png

As on March 31st, 2019 the outstanding receivable from YCL amounted to Rs.3.64/- crores. The said the outstanding balance of Rs. 3.64 Crores is already settled in the current financial year.

Screenshot 2020-03-09 at 2.07.06 PM.png

I don’t have much clarity on this transaction terms and conditions but this is something investors should be asking the promoters but I do see the board has passed to the resolution to make it a wholly-owned subsidiary of the company.

This itself clarifies a lot of things –

Screenshot 2020-03-09 at 1.51.29 PM.png

At least there is no intent of siphoning off the money from this related company here.

Miscellaneous –

Sumant Pai, Head of Sales, Yash Papers Ltd at Restaurant India 2017 –

Feb 13, 2019 – Government has put anti dumping duty – Anti-dumping Duty has pushed up A4, A3 Paper prices by 10 to 15 Percent. ( This has put Indian paper mills at much more level playing field)

https://www.youtube.com/watch?v=Q72Qjl3r_FE

“With a per capita consumption of paper being only 13-14 kg per annum in India as compared to the global average of 57 kg — not to talk about around 200 kg in developed countries — the opportunity for growth in our country is huge”, said Harsh Pati Singhania, Vice Chairman & Managing Director, JK Paper.

The people who are running Chuk?

They were able to attract decent talent to work for them from some of the top grad schools of India –

https://www.linkedin.com/in/amit452/

https://www.linkedin.com/in/sumant-pai-089269b7/

https://www.linkedin.com/in/vibha-gajbhiye-29972654/

https://www.linkedin.com/in/jagdeep-hira-62a34419b/

https://www.linkedin.com/in/shailesh-singh-a279131a/

https://www.linkedin.com/in/sachin-sharma-8084a850/

https://www.linkedin.com/in/chetan-nibjiya/

https://www.linkedin.com/in/jasmeen-kaur-02a14b78/

https://www.linkedin.com/in/sangeetareen/

Blogs by Ved Krishna –

https://www.linkedin.com/pulse/yash-papers-learning-building-meaningful-ved-krishna/?published=t

 

 

THANKS

BLOGS ARE NOT A RECOMMENDATION SERVICE – These are my personal views about the Business Quality, Management Quality, Business Execution & Performance.

Thanks,

Dhruva Pandey 

Email : dhruva.pandey@outlook.com
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Dhruva Pandey
Dhruva looks for companies with a durable competitive advantage that are run by honest people, and available at a price that makes sense to him. His interests include technology, investing, markets, psychology, and chess.
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