Paper Sector Concall Transcript; Conference Call to discuss the changing dynamics in domestic paper sector:: Emkay

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Paper sector Con Call
Conference Call Transcript

Conference Call to discuss the changing dynamics in domestic paper sector

Participating Management:

From Ballarpur Industries       

            Mr. Rajeev Vederah – Managing Director

            Mr.  B. Hariharan – Group Director (Finance)

            Mr. Vivek Goyal – Chief Financial Officer

From JK Paper

            Mr. Kumaraswamy – Chief Financial Officer

            Mr. O. P. Goyal – Whole Time Director

Moderator

Ladies and gentlemen good evening and welcome to the conference call hosted by Emkay Global Financial Services Limited.

We have with us today the top management of Ballarpur Industries. In this call, we will get a view on the paper industry

dynamics followed by a Q&A session. The session will last for a period of 30 minutes. We will commence this call with

Ballarpur Indus tries starting from 5:00 pm in which the management will first share their views which would then followed by a

question and answer session. As a reminder all participant lines will be in the listen-only mode and there will be an opportunity

for you to ask questions at the end of today’s session. If you should need assistance during the conference call, please signal

an operator by pressing * and then 0 on your touch-tone telephone. Please note that this conference is being recorded. I would

now like to hand the conference over to Mr. Rohan Gupta – Senior Research Analyst at Emkay Global. Thank you and over to

you sir.

Rohan Gupta

Thank you Melissa, Good evening Ladies and gentlemen thanks to the participants for logging for the conference call where

we are going to discuss about the changing dynamics of paper industry. First as mentioned by Melissa we have management

of Ballarpur Industries, Melissa are the management lines open now?

Rohan Gupta

Yes, hi sir thanks a lot for giving us your valuable time. From Ballarpur– we have Mr. Hariharan, Mr. Vederah and Mr.Goyal.

Good evening sir - thanks a lot gentlemen for arranging this conference call. As we would like to request to all the participants

to restrict their questions on the industry itself rather than having any specific question on the company, but any comments on

the management side is welcome on the industry as a company. Sir, first I would like to request you, if you can go ahead with

giving the brief about the changing dynamics of the papers industry that we can follow it up with a question and answer

session.

Hariharan

I think Mr. Vederah will start the proceedings.

Question and Answer Session

Rajeeev Vederah

Now when you say changing dynamics, you are basically referring to the acquisition.

Rohan Gupta

Sir, yes we have seen, in fact I think all my investors will have a lot of questions about that, so you just first share your view

why that happened and at what valuation and whether that kind of such valuations are justified. What is International Paper’s

idea about this acquisition and how we can see that it will have an impact on the domestic industry.

Rajeev Vederah

Okay, I think I am sure all of us were aware and I am sure most of you would be aware that India is of considerable interest

with respect to its growing paper production with the world majors, I think there is nothing hidden about it, I think for several

years you are seeing a lot of European and large western companies looking at India especially companies who have missed

out the growth cycle in China or who could not take its big position in China would not like to miss the India opportunity. I think

this is what has been their consideration and they have been looking at best possible way to enter. We have seen in the past

newsprint manufacturers doing a lot of enquiries in India, looking at sites because you know that in newsprint, almost 50% of

the country consumption is imported. We have seen recently in December when the packaging corrugated box manufacturer’s

association was there it was a bee line by some large companies to look at our changing scenario on the container board and

the corrugated box segment of the industry. Of course you also know and we all of us are aware that India happens to be the

fastest growing paper market in the world, inspite of the fact that we are a relatively small base. We have seen the kind of

investments with the existing players in the industry have put in. You have seen Ballarpur’s investments; you have seen most

of the organized sector coming in with major capacity expansions both on the paper side and the pulp side. We are not really

surprised that finally some world major has taken a position in the country. I think the value which it has paid is welcome

because it would unlock a lot of value for the existing players due to the fact that the Indian stock market has not been giving

true value to the paper sector and I think reasons are very clear, A) is not a research industry, B) I do not know what kind of

tags of the industry that it chops trees, it pollutes the water but that is a phenomena all over the world and you can see that

the Indian industry has taken some major steps to try to improve its environmental footprint .

So, I expect that this International Paper’s acquisition of APPM, which is one of the recognized players in the organized sector.

I think they are a good company and they have realized good value for their stock. I think may be the time when eventually the

paper sector will get rerated actually.

Rohan Gupta

Yes sir, sir something like, I mean would you like to add in terms of your own company that you had delayed your program for

listing of subsidiary?

Hariharan

Yes, I think as you all know that that we were ready to list the subsidiary which is Bilt Paper Plc on the London stock market at

valuations which were expected to be significantly higher than what we as a company get in India, but with this announcement

I think we need to review what is going to happen in the country. Our benchmark valuation - in our view, currently we do not

have a benchmark valuation in India . But generally if you compare ourselves with the Asian peers, the valuations are

significantly lower so that is one of the reasons why we created this structure for London listing where we expect the

valuations to be higher as in what we get in India but now that we have a benchmark of valuation, which is available in this

country. A company which is almost one-fourth of our size, we thought that it is very important to channel what are the pros

and cons of doing a listing in London now and what should be our expected valuations looking forward. So, our board has

advised us that let us put on hold for couple of months and see the situation and then take a call as to how we need to

approach this, so that is the reason why we put it on hold.

Rohan Gupta

Okay I think our participants will be having a lot of questions. Melissa, can you please open the line for Q&A session?

Moderator

Sure. We have the first question from the line of Amol Rao from Antique Stock Broking, please go ahead.

Amol Rao

Mr. Hariharan and Mr. Vederah, I just wanted to ask you this deal looks overpriced but as people from the paper industry, do

you think the premium was very miniscule considering the fact that it is very difficult to set up a paper plant in India. Secondly,

looking at comparative valuations for the London listing, this kind of premium was paid by strategic investor so do you think

financial investors would be willing or do have the appetite to pay such a premium or a similar amount to a company of our

size?

Rajeev Vederah

You are right in the sense that this acquisition has got a strategy premium to it, definitely the financial investors will not pay

that kind of a premium, but at the same time there is an establishment of a benchmark in India for a paper company which is

very small compared to our size, so that makes us think that whatever we have been trying to justify to the Indian investors

and also to the potential investors who are coming in the listing that India is one of the best markets to do paper business. The

paper industry in India is currently not valued appropriately. There is huge potential for rerating possibilities in India for the

paper stock and also the fact that we should compare ourselves with the global peers and Asian peers in terms of valuation.

So, that is getting established but we definitely agree with your point that strategic investors will definitely pay strategic

premium to get control of the company than our financial investors. But at the same time till this deal was done there has been

no benchmark of an international major doing an acquisition in the paper business in the country. So, even if you exclude that

25% or 30% premium you might have paid for acquiring a strategic stake in the company, still valuation is different from what

we were getting in the Indian market as a paper company.

Hariharan

Also to add further this question, the first part of your question that whether he has paid high price. I think that International

Paper is the largest paper company in the world, they are a established company, I am sure they have done a very detailed

due diligence of what they should pay for a company like this in India, what growth potential it has. So, I do not think so that

from International Paper’s point of view, they would have paid a high value for this company and this process has been going

on for quite some time and they have taken a very detailed look at the whole situation before agreeing to pay such a value for

this company.

Amol Rao

I see, I just had one small follow up question, getting a sense from couple of management of paper companies, I know the

industry is much maligned but sir as everybody is getting scaled now, I mean almost a million tonnes has come on stream in

the last say 18 months, going forward do you think that although the need is there, the natural fiber based paper players have

the linkages to put up capacity in the sense that wood, coal, chemicals that kind of stuff is, I mean the prices are not really

very, let us say stable, I mean the margin profile of these things vis-à-vis paper plays a lot of fluidity in let us say EBITDA. So,

any thoughts on that sir.

Rajeev Vederah

Well, let me say that out of the total paper produced in the country, almost 66% to 70% comes from virgin fibers, it may not be

wood, but there are agro residues for the rest of it. So, the question is we are not saying that the capacity increase in the

country will only come through the usage of wood; it would also come through the usage of unconventional materials other

than waste paper. So, now I personally feel that India today is sitting back and we have not been able to get to government to

have a captive plantation policy; India is still sitting on large tracks of degraded forest and revenue lands. Out of the total 325

million hectares of a land mark, 60 to 65 million hectares is still degraded and what the industry really needs is about 2 million

hectares of land to grow in the short term, in line with consumption which is going to come about in the country, but still

nevertheless I think that the industry’s interaction with the farmers and the motivation of the farmers to grow wood or trees as

an alternative to its cash crops on these marginal lands has been a success story and as the price of wood will go up in

relation to its demand, I think more farmers would be motivated to grow trees, so at least in the short term, we do not see a

problem in securing our wood indigenously and also you know that companies like us have already gone to Malaysia where

we have a standing land, I mean wood bank of almost 8 million tonnes of trees for us to grow our capacity, so we are far more

secured than anybody else in terms of wood availability.

Amol Rao

Okay sir thank you so much sir. All the best.

Moderator

Thank you. The next question is from the line of Amar Kalkundrikar from HDFC Mutual Fund, please go ahead.

Amar Kalkundrikar

My question is for Mr. Hariharan. Sir, if you see paper industry, if I look at BILT number or TNPL’s numbers for last 5-10 years,

the return on equity or return on net worth has been on an average around 15%, it has never touched even 20%. Do you see

any triggers over medium to long term whereby this ROE can exceed over 20% levels?

Hariharan

Actually, ROE increased beyond 15% when we did the buyback in 2007. We were in the expansion stage of the paper

capacity which was expanded and now we are in the expansion mode as far as the pulp capacity is concerned. So, when the

pulp operation becomes fully integrated, the EBITDA margins are going to go up by at least 6% to 7% from the current levels.

Once we reach that,we will see that the return on equity number also significantly improves and our target is to get to a level of

20% return on equity, so once we have fully integrated paper capacity I think that is the time when we target 20% return on

equity because then the impact of the integration will be very clearly –I was telling that when in 2007 we did a correction in the

capital structure, got back some capital so very clearly we were in line with the expectations, but after that we are in

expansion mode. So, now that we are expanding the paper capacity and not integrated on pulp, EBITDA margins are lower so

the return on equity numbers are also lower. So, once the paper operations become fully integrated with the pulp we will see

significant jump in the EBITDA margins which will also result in overall return on equity number going up beyond 15%.

Amar Kalkundrikar

Sir, how do the return on net worth of Indian companies compare with regional peers from Southeast Asia?

Hariharan

I think those Indian, companies which are fully integrated will be definitely higher than the global peers, both in terms of return

of capital employed and return on equity.

Amar Kalkundrikar

And where would that number be approximately?

Hariharan

I think the return on equity number would be in the region of 12% to 13% and return on capital employed numbers will be 7%

to 8% maximum. I think the reason there is of course the cost of capital is also lower and even if you look at International

Paper their average EBITDA margin is in the region of 12% to 13%.

Amar Kalkundrikar

Okay, alright sir that is it from my side, thank you very much.

Moderator

Thank you. The next question is from the line of Sri Hari Sheshadri from Sundaram Mutual Fund, please go ahead.

Sri Hari Sheshadri

Sir, could you just talk a bit about your expectations on global papers and pulp prices, how do you see the next two years in

terms of the price movements and impact for Indian companies in terms of prices this year?

Hariharan

Coated paper prices are firming up in international market, again I think I have seen prices hovering around $950 currently, so

we are seeing some firming and then we are also seeing some cost increases which are getting passed on to -- we have

increased our prices from Rs.1500 and we are expecting some more increases to come. So, our view is that the global paper

prices are linked to the pulp prices, so the pulp prices are still very strong quoting around $700 to $750.

Sri Hari Sheshadri

So you are talking about the price hikes that you have taken in India of Rs.1500?

Hariharan

Yes, so what I am saying is that the paper demand is very strong in India, the global paper prices are firming up, so they have

gone up from $800 to almost $950. The pulp prices are higher now, it came down to $600 – 650 and is going up now to $750.

We expect the paper prices to fall in line with the pulp prices. We do not see any major softening of the global paper prices in

the next 12 to 18 months.

Sri Hari Sheshadri

Sir, we read in some of the search reports that we saw the integrated players virtually shut paper capacity and using the pulp

making capacity to sell more pulp to the market given that it is highly profitable and hence there is a view that pulp prices

would have already seen the peak at this point in time and then come off over the next one year. Do you expect something

similar-?

Rajeev Vederah

See, I want to tell you that pulp, sorry I missed your earlier point, the pulp price is directly linked to the wood price and wood

price is unfortunately seeing a very strong situation because of it’s alternative use into bio fuels actually, so to that extent let

me tell you that the new projects of pulps which are coming are based on a base line value of $600 FOB of pulp that was and

the CEO of a large company told me a year back that the emphasis will be on bio energy, I can tell you that and you are

seeing the valuations of the plantations today. The valuations of plantations have gone to a level which you may not be able to

justify even at the current prices of wood pulp. So, under those circumstances, you know that the long fiber today is over

$1,000 actually, because it is somewhere finding a place in viscose grade pulp and viscose grade pulp is selling at $2,300

because the cotton crop is not there, so I do not think this pulp prices will come down to $ 650 and they quickly hurdle back to

$750. $750 is the hard wood price today. So, I do not think so that at least we are not seeing a softening of this pulp prices in

short and medium term actually. And I can also tell you that generally speaking you will find that they are more integrated

better players than pulp producer, so if you ask me to sell pulp I will not do that I will definitely convert pulp in to paper and sell

paper actually.

Sri Hari Sheshadri

Okay and in terms of the Indian market, I mean lot of higher end usage of paper like the tissues and other applications the

tissue, etc, prior to increase what is the kind of growth that you see in this value added paper market or the products market

and let us say in 5 to 10 years where do you see that market size compared to where it is today?

Rajeev Vederah

Yes, let me tell you about tissues for example, you see the soft tissue as we are talking about, the consumption in India today

is very low, let us say the total tissue, soft tissue consumption in the country in terms of finish products and the jumbo rolls

may be less that 100,000 tonnes okay, it could be nearly 70,000/ 75,000 tonnes. China today it is close to 4 million tonnes. So,

therefore as GDP grows and as per capita income increases, there will be disposable income available with individual and

you will see this kind of lifestyle products finding a place. We expect that there is a growth in excess of 20% in tissue

consumption in the country, but unfortunately the base is very small because it is all related to per capita disposal income. You

know that Ballarpur is seeing little long into the future and tissue is the value added product, it is sitting at end of the top of the

pile that we have already taken a position with the acquisition of Premier Tissues which is the largest producer of soft tissue

products in the country. We are very bullish about the tissue market, though it is a small business today.

Sri Hari Sheshadri

Okay and just for an analyst to understand if you probably make say Rs 8000 EBITDA for normal coated paper or in 20%

kind of margins. If you were to take it forward to a value added product like tissue and if you have the entire value chain so

what would be the EBITDA that is possible in value added products, just-?

Rajeev Vederah

Please understand that even in the deepest of recession you would have seen that tissue companies which were into hygiene

products made money. The idea is to create a brand as a matter of fact and then you will see that their relationship between

cost and price is not linear, so the question is that we have to still establish a brand itself in an unorganized market in the

country today. So, Ballarpur fortunately with the Premier Tissue acquisition would get an advantage and if the EBITDA margin

is Rs.8000 a tonne if you understand most of the people in the country today are buying the jumbo roll and then converting, so

then the value add is quite limited and the brands are very fragmented. But definitely you can say that the EBITDA margin in

an integrated business in paper is 25%/ 26% and then may be you could go to 35%-40% when you are going right up to the

value chain of selling tissue box actually.

Sri Hari Sheshadri

Okay.

Rohan Gupta

Sri Hari, Rohan here. Sorry to interrupt you, can we have more specific question on the industry if you have, company specific

questions we can always have later on the call.

Sri Hari Sheshadri

No those are industry questions, not the company specific question.

Rohan Gupta

I mean industry when I was asking – deal related question because we will be joined later on by the other management also,

so do you have any other questions on the industry, I mean about this deal or about the valuations of the paper industry?

Sri Hari Sheshadri

No, thank you very much Rohan.

Rohan Gupta

Yes, we can always have a call later on. Hello, Melissa.

Moderator

Yes sir.

Rohan Gupta

Can we have a last question?

Moderator

Sure sir, we have no further question in queue.

Rohan Gupta

Okay, sir we would just like to understand that this International Paper or another global player entering into the domestic

market, how do you see the competition changing in the industry, because so far I have seen there were only domestic

players in the market. So, how it is going to change the overall dynamics of the domestic industry?

Rajeev Vederah

For the industry, a lot of us would get more efficient as a matter of fact because of company like International Paper there in

the market, so I think it is good for healthy competition and for the industry.

Speaker

We expect consolidation, more consolidation happening in the industry that is our feeling.

Rohan Gupta

Sir, when we say consolidation, I mean you are also indicating that your company or some domestic companies acquiring

some domestic company is that the possibility also?

Rajeev Vederah

No, point is that when the valuations become benchmark, I think there will be consolidation possibility happening. When you

are thinking at valuations which are not up to international valuations I think there will be more interest for companies to exit

the business and create opportunities for companies like us.

Rohan Gupta

Sir, second thing do you think that some more things happening and some other global companies are still looking for

acquisition?

Management

There are lot of global companies which might come into the county because International Paper’s entry into the country only

proves that India is one of the best markets for the paper business because globally the growth rate is 2% whereas, we are

seeing for value added papers and hi bright papers, coated papers and copier paper, the growth rate is in excess of 10%. It’s

an announcement that India is a good market, India is a very good place to do paper business, that is why International Paper

has come and I think you may be right that there may be others who would be willing to now look at India as a potential

market.

Rohan Gupta

If I just put it in other way, are more companies available in Indian market? I can understand that one deal happened or it is

the end of the whole thing and then probably you may not see something happening for next 10 years or something like that.

Management

I think Rohan there are other companies which are there but it’s a very difficult question to answer but our feeling is that there

will be more companies which will be on the block to be acquired. So there can be consolidation happening.

Rohan Gupta

Okay. Thanks a lot sir. Thank you for taking the timeout, I will request all the participants please don’t log out from the call. JK

Paper management will be joining us shortly. Once again thanks a lot to the BILTmanagement. Thank you very much sir for

sharing your outlook on the industry and changing dynamics about it and thanks a lot.

Rohan Gupta

Yeah. Mr. Kumaraswamy has joined us from JK Paper, good evening.

Kumaraswamy

O. P. Goyal who is our Whole Time Director has also joined in.

Rohan Gupta

Okay. Good afternoon Mr. Goyal.

O. P. Goyal

Yeah.

Rohan Gupta

Yes. Sir, we just had a call with the management of BILT where they shared their outlook about the industry changing

dynamics with International Paper’s entry into Indian market, how they are going to have impact on the domestic market and

all that. Now we would like to hear from you how you see this acquisition and how it is going to impact the overall domestic

industry including our company. So sir, you can just share your view and then we can follow up with a Q&A session.

Kumaraswamy

In general very, very positive, the operations perspective, market perspective, etc., and the kind of impact that it will have in

the Indian paper industry from the supplier side, consumer side any competition is good, they will always gain, there is no

doubt about it whatsoever, International Paper is a leading international player, they will bring international quality paper to

India, we welcome it and it will upgrade our practices also to the extent Indian paper industry if it is all behind but from a

valuation perspective double plus, double is very, very good. Indian paper industry has not been valued at all properly. There

has been a heavy undervaluation, look at the ROCE’s of the world industry and India. World industry’s average ROCE is 4% to

5% from 2003-2004 onwards. We are almost at 12%-13%, I am talking about the top seven in the Indian industry, the Asian

average is about 7% to 8%, ROCE I am talking about, average. But if you look at valuations, our companies are going at PE

multiple of 6-7 or 7-8 and the EBITDA evaluations 5, 5.5-6 kind of types. If you look at the global valuation they are at 20-21

kind of PE levels and the EBIDTA of 9 to 11 depending upon which zone you are talking about. So I guess it’s a very positive

move from the valuation perspective and I think gradually the Indian paper industry will only benefit from the valuation

perspective and Indian paper industry investors will definitely benefit over the medium term, that’s our reading.

Rohan Gupta

Okay. Sir, can you please tell more about how it is going to change that competition in the industry and whether this valuation

should be taken as a benchmark or is it just one-off deal which has happened and then not likely to see any such deal

happening in the domestic market because you just cannot take a parameter if that one deal happened and then the whole

industry should get rerated?

Kumaraswamy

I have one or two points here. The valuation is very attractive no doubt. Portion of this premium is because of what they see as

a future, I am sure they must have done the due diligence and identify the areas of improvement which they can bring about in

Andhra Pradesh’s Paper’s operations. APPM also had recently expanded so the capacity additions also they would have

taken into account. The part of the premium is because of that. The part of the premium also is because of going to cross the

49% line of acquiring control. One doesn’t know how much they have paid for the control premium, how much for the

operations side. So I guess at least the operations side of it any of the Indian companies are not very far behind compared to

International Paper operations. Our chemical recovery percentage is almost in decimal point difference with the international

players, if they are let’s say 95.9 or something, we are 95.8 things like that. And water consumptions yes, of course we have

twice this much but we are improving. The manpower cost, total I am talking about although we employee maybe three to four

times the manpower, but manpower as a percentage of a total sales is not more than that. So operationally Indian paper

industry is very, very effective although we possess what I would call I need pilot plants compared to the world scale, they

never talk about anything less than 400000 or 500000 tonnes. I think Indian average size is about 38000 tonnes amongst the

top 10, 12 players. So one must be proud of Indian paper industries operating efficiencies compared to the global this one

despite the scale disadvantages. From that perspective I guess whatever the operating premium the valuations will catch on.

Control premium obviously will come with controls so to that extent one can’t say how much this valuation represents the total

valuations that we will graduate by.

Rohan Gupta

Okay. Mellissa can we open this call for Q&A session?

Moderator

Thank you. We have the first question from the line of Neeraj Toshniwal from SPA Securities, please go ahead.

Neeraj Toshniwal

One question from my side, I wanted to know that as you are expanding your capacity from 2.4 lakh tonnes to 3.6 lakh tonnes

at around something like 1500 crores . Where do you see your company getting rerated from this deal actually?

Kumaraswamy

I mean, from this deal you mean or in general?

Neeraj Toshniwal

In general because in the capital outlay per tonne if you consider that parameter for the industry that is also very much in line

of APPM which they have also expanded of late. So do you also see a rerating of your company and at what levels?

Kumaraswamy

Okay. From an operation perspective I will run it and I don’t know about valuation we will talk about it later.

Neeraj Toshniwal

Okay.

Kumaraswamy

Actually we are adding about 165000 tonnes of paper capacity in copier you deduct about 40 for some decommissioning

which is happening. We are putting up a pulp mill of around 225000 tonnes that will leave another additional 20000 tonnes

pulp apart from what we have surplus already. So that is also a value addition. So on approximate basis, the valuation basis

for this new expansion is slightly less than what this deal implies and to say that is not by far may be about 15% lower on a per

tonne capacity basis. In terms of the operating efficiencies a new technology for pulp as this one consumes half water,

currently our total per tonne water consumption is about 84-85 meter³/tonne which will come down to almost about 40-43. And

they had also energy releases rather than consuming energy, we have been getting about 2% or 3% and of course the biggest

saving is coming from the overheads, this pulp mill can operate with the existing infrastructure itself in the unit of JKPM without

adding anything significant to any of these supports, staff services and things like that, where these capacity is doubling

without the attendant cost doubling and we roughly pay about 13%, 14% for all these cost as of now. Capacity is doubled

without the operating cost doubling which means we have 5% to 6% saving on this one. The value addition most probably

obviously is coming from the operating efficiencies that we will achieve because of the increased scale. But how much it will

result in valuation you have got to judge.

Neeraj Toshniwal

Okay sir. On the same issue what do you take of it at the capital outlay further if you just go for a new capacity like of yours,

how much is the capital outlay CapEx that will be considered?

Kumaraswamy

See, we were so far working on a benchmark of something like 1.2, 1.25. That it might be slightly up compared to what

benchmarks we were working and maybe about a couple of years back, if you look at the kind of valuations that is being paid

even in the operations front it looks like people have started working on higher numbers.

Neeraj Toshniwal

Okay. So what numbers you are looking at sir?

Kumaraswamy

Premium I think you should use about 1.25-1.3 kind of for an integrated mill that is pulp and paper put together. Totally the

pulp a little more than the halfway mark and paper a little less than half way mark. So you can say about 60-65 is for pulp and

the balance for paper for the annual tonne.

Neeraj Toshniwal

Okay. Can you repeat the last thing or the half way mark that you mentioned?

Kumaraswamy

I am talking about 125 to 130 the 60-62 is the halfway mark. Pulp will be a little more than 62-65, paper will be a little less

maybe about 55000 per tonne.

Neeraj Toshniwal

Okay. Thank you sir, that’s it from side.

Moderator

We have the next question from the line of Rahul Bhangadia from Lucky Securities, please go ahead.

Rahul Bhangadia

My first question was out of the total about 10 million tonnes of capacity in the country how much would be based on recycle

paper?

Kumaraswamy

Recycle paper will be around 35% roughly, the balance is on virgin fiber.

Rahul Bhangadia

And the 35% would that basically mathematically mean, is it fair to assume that they would require maybe 3, 3.5 million tonnes

of recycle paper roughly.

Kumaraswamy

Yes, yeah that’s what it means.

Rahul Bhangadia

And so these would be basically imported right because India doesn’t recollect or recycle 3.5 million?

Kumaraswamy

80% I am told is the imported component of recycle, maybe about 70 to 80 and balance is forced internally within India.

Rahul Bhangadia

Okay. And what has been the price trend in the recycle paper itself?

Kumaraswamy

I have to plead my ignorance because we are not into recycle at all.

Rahul Bhangadia

I just thought that you are aware of that.

Kumaraswamy

We don’t have much.

O. P. Goyal

The difference between recycle paper and the virgin papers will be almost Rs.5 to Rs.7 per kg or Rs. 5000 to Rs. 7000 per

tonne.

Rahul Bhangadia

The difference between recycle and virgin paper, is it?

O. P. Goyal

Paper processed out of recycling fiber and the paper processed out of virgin fiber. The difference is Rs. 5000 to 7000.

Rahul Bhangadia

Okay. And just one more broad question for the companies who are actually importing pulp in India, what are the major

sources from which pulp is imported as in do does India import a lot of pulp from Europe or does a lot of it comes from Brazil?

Kumaraswamy

It is but depends on the kind of pulp you are talking about. If it is hardwood pulp which is required for manufacture of paper

Indonesia, Brazil these are the two major sources of pulp. We are talking of softwood, countries in the extreme towards the

poles like New Zealand, Canada, Nordic countries these are the sources. CMC again comes largely from Europe that is

seeing what is required for the manufacture of paper boards; packaging board that I think is mainly confined to us in the ITC.

Rahul Bhangadia

Okay. And my last question is for these import would you have a sense of what will be the transportation cost?

Kumaraswamy

Transportation cost will depend only on the port from which you are importing. It can vary quite much and secondly of course

in hardwood pulp even Chile maybe a source. Again the freight cost has fallen sharply if you see in the last about three-four

months . That is also a factor which you should take into consideration while pushing the numbers.

Rahul Bhangadia

Okay. And what is the kind of inflation that you are seeing in the chemical prices that you use up in your pulp and paper?

O. P. Goyal

Inflation in chemical that we use is about 3% to 5%.

Rahul Bhangadia

Okay. Thank you so much.

Moderator

Thank you. The next question is from the line of Ravi Chandran from Unifi Capital, please go ahead.

Ravi Chandran

This is a broad question, using recycled paper is much more productive than using pulp for the industry and where is the

capacity expansion in the country going to come from more of recycled paper based or a pulp based?

Kumaraswamy

See, there are some question marks on this recycling aspects now being raised. Somehow this theory is emerging that

recycling is not as beneficial as earlier thought out to be because it consumes energy and then repulp it and use it, whereas

virgin fiber, the first of all it leads to better quality of pulp and also it absorbs a lot of carbon dioxide in the growth phase virgin

fiber when it is grown. And technically it is always beneficial to cut down the trees after sometime and replant it so that it starts

absorbing carbon at a faster rate once again. So your question is a little- there are positives in growing virgin forest to

manufacture paper. In the last 10 to 12 years if you see the paper industry has on an average added to the green cover rather

than subtracting from it. And during the growth phase it absorbs carbon at a very high rate and to store it inside its body and

even when it becomes a little this one it recycles carbon dioxide into oxygen that is their process of breathing. So I think it’s a

little bit of myth to assume that recycled fiber is better than virgin fiber. Beyond that I don’t have the specific numbers for

economics of recycle...

Ravi Chandran

Thank you. My last question is on the value added products like glaze paper and art paper and things like that. We don’t find

too many companies talking about it is more of newspaper and the PWP, is there any specific reason the country is importing

lot of art paper and glaze paper why no company in India is really talking about these products.

O. P. Goyal

Total consumption for the art paper is not that much and it is Ballarpur and JK ,these two are the manufacturers of this art

paper and the art roll and then about a 1 lakh tonne paper is imported from outside India. As we see the import component of

the art paper is much less which was much more about three, four years ago.

Kumaraswamy

And obviously the market determines what it wants and we are here to read it and supply it rather than dictate what the market

should consume. Our per capita consumption is about 9 kg. So within that what is consumed is what is the first priority, the

business consumes more of office papers writing and printing paper and that’s what dictates the current demand.

Ravi Chandran

Thank you sir.

Moderator

Thank you. The next question is from the line of Balwindar from Emkay Global, please go ahead.

Balwindar

Yeah, I would like to ask what are the chances of consolidation in the near future and what kind of valuation do you see? Will it

be similar to APPM- International Paper deal or lower than that?

Kumaraswamy

The valuations, well is purely determined by two or three things . What kind of potential they see for operating improvis ation

plus, control premium , etc. But having said that this deal will definitely have a positive impact in the valuations of our industry

in general and about consolidation, my belief is that it would be the indirect kind of consolidation not a direct kind of

consolidation because any of the smaller players who are too small, inefficient and operating parameters are not good, they

are sitting on very tiny pieces of land meant for local markets, quality wise not that great and things like that. Our reading is

may be they will wither away and these bigger players will keep expanding to occupy the space that they vacate. There is an

indirect kind of consolidation, not a direct consolidation by mergers and acquisitions and takeovers.

Balwindar

Thank you.

Moderator:

Thank you. We have our next question from the line of Sri Hari Sheshadri from Sundaram Mutual Fund. Please go ahead.

Sri Hari Sheshadri

Sir, can you give me an idea of what is the size of various companies, for example number of tonnes per day. The size of

different capacities in India and how much the bigger companies have and what is that sales wise in smaller companies ?

Kumaraswamy

Can I do one thing? You leave one email with Emkay, Mr. Rohan Gupta. To answer this kind of questions we will require a

table. We will email it to you.

Kumaraswamy

This is Kumaraswamy responding to Mr. Sheshadri’s query. The information you wanted, alternatively are available with

CRISIL report or as well as IPMA website. You can access it there or if you send your email, I will send it you.

Sri Hari Sheshadri

I will have a look at this thank you lot sir.

Moderator

The next question is from the line of Rahul Soni from SKS Capital. Please go ahead.

Rahul Soni

Sir you said that India has a existing paper mill capacity of around 10 million tonnes . So I just want to know how much we are

dependent on imported pulp.

Kumaraswamy

Most of the Indian top 10 player are integrated players and except ITC and JK Paper for board operation, they im port BCTMP

pulp. We in a small way import hard wood pulp also. Ballarpur also imports different pulp for their operations for the important

paper operations, but India, you should consider as largely an integrated operator.

Rahul Soni

So you mean to say players mostly are dependent on pulp?

Kumaraswamy

They have the pulp mill as well as the paper mill and they source wood from within the market and manufacture their own pulp

and paper.

Rahul Soni

Okay sir. Thank you.

Moderator

Thank you.

Rohan Gupta

Sir we are through with the question and answer session. Just, I would like to know that do you see any specific competition in

terms of that in paper industry a global player entering into Indian market. Will the dynamics or any paper dynamics change

going forward or just remain there? How the international practices are different from domestic practices or are we going to

see some kind of changes or it would just remain status quo?

Kumaraswamy

Let me tell you, many international players are looking at India seriously, because India is the fastest growing market

delivering ROCEs which are nearly three to four times the world average so all of them are serious . But having said that the

scale of operations in India are much smaller than they would like it to be but sooner or later it is going to graduate because

some of the segments are growing at 15% - 20% growth rates coated paper, copier paper, packaging board, and select

segments . So obviously sooner or later it will meet their entry level criteria so they will all be looking at it. But having said that

the Indian industry is barely benchmarked against international paper operators . I'm not saying that they are better, but many

parameters they are almost up there and if you ask international players to operate our size of capacities that will be a very

tough call for them . So there will obviously be better practices because they are international players to that extent because of

industry movement...

Rohan Gupta

Possibly the size of the industry, I mean, our industry is...

Kumaraswamy

Raw material is a big issue in the country, in the sense of availability of wood and all. You can’t put up, half a million tonne

plant at any one location and hope to survive. That’s impossible.

O. P. Goyal

All the multinational who are interested and looking to India, they have got the big issue of the raw material. Most of the

multinationals, they have got the raw material judgment they have got their own plantation because their government has

allowed land for plantation. In India the land is not allowed by the government for plantation and that is the reason the

multinational has to find out the way how they can make the raw material. Many Indian companies do the plantation, social

forestry, hard forestry in a big way and that is getting the raw material to us . That is the issue with all the multinational

companies where is the raw material in India. That is a biggest core block for them.

Rohan Gupta

So it may happen that some of the global pulp companies who have surplus pulp facilities, for them, is this an effective

destination to come into India and only set up a paper plant and supply their own captive pulp from outside India?

O. P. Goyal

Whether they make the profit from sale of the pulp or they make the profit from sale of paper. That will define the criteria for

them to hit the pulp and paper facility in India.

Kumaraswamy

Yeah as it stands today, the dynamics of importing pulp to here and making paper and selling and making money as it stands

today, it is better to process wood from local domestic markets into pulp into paper, and sell. Because although our wood cost

locally is very high, the cost of transportation cost of drying, etc., pulp and then inland transportation negates all this benefit of

having an overs eas pulp mill to supply pulp within India. But having said that this dynamics will change over a period of time

may be five years later or seven years later. It might be cheaper to import pulp and manufacture paper.

Rohan Gupta

So now to have an integrated pulp machine only will make sense?

Kumaraswamy

That is better as of now. Rohan, sorry I have to step out for a call.

Rohan Gupta

Yes sir no problem . We are anyway through with the call.

Kumaraswamy

I'm sorry, I have to sign off all abruptly, but I'm willing to take a call on Wednesday if you want further...

Rohan Gupta

We are through with the call and thanks a lot for giving us your valuable time and sharing your outlook with all of us.

Kumaraswamy

It is always a pleasure to meet the investors and understand their perspective and we will always be there for...

Rohan Gupta

For Mr. Sri Hari, we will send you the required details . We will send you the mail forward for that and on behalf of Emkay

Global Financial services I thank all the participants who logged in for the conference call for the BILT and JK Paper I think it

has been very much informative and probably our investors had a lot of doubt about this so...

Kumaraswamy

Our thanks from JK Paper for asking us very interesting questions and we always look forward to interactions with them.

Rohan Gupta

Okay. Thank you once again sir thanks a lot.

Kumaraswamy

Thank you.

Moderator

Thank you gentlemen of the management, thank you Mr. Gupta. Ladies and gentlemen on behalf of Emkay Global that

concludes this conference call. Thank you for joining us and you may now disconnect your lines.

Note: 1.This document has been edited to improve readability.

2. Blanks in this transcript represent inaudible or incomprehensible words.