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Strategic
Business & Risk Analysis

Term IV: PGP 23

Aug - Oct 2020
Prof. Venkataraman S

JK Paper Limited (JKPL)

Internal Business Risk Assessment

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JKPL: Market Position

• One of the largest players in the domestic WPP segment
• Installed capacity of 455,000 tpa.
• Wide WPP product range
• 50 gram per square metre (gsm) to 110 gsm
• Maplitho, copier, and pigment paper.
• Product mix evolved - focus on higher value-added segments such as
copier paper
• Market leader across multiple segments
• Largest in the copier segment (with a market share of 23%)
• Second largest - paper- board segment (12% market share)
• Second largest - coated paper segment (11% market share)
• Market leadership allows it to position its copier offerings at a
premium
• Favourable location of plants help maximise geographical
coverage
• Gujarat plant caters to West & North India; Odisha to South & East India
• Expansion of distributorship to Class B and C cities.
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JKPL: Market Position

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JKPL: Market Position

• Despite competition, the company has sustained its strong
market position over several years
• Established brand with leadership in the copier segment
• Diversified product portfolio and customer base
• Robust distribution network.
• Successful regular capacity expansion à high growth & sustenance of
market share
• Expansion plan of up to 200 kt in the packaging board segment
(including pulp capacity of 160 kt), at a cost of Rs 14.50 billion
between 2019 ~2021
• Will help consolidate its leading market position
• Expansion will strengthen market prospects
• Strong industry demand fundamentals (driven by growth in
pharmaceuticals, FMCG, and E-commerce segments)
• Increased market preference for premium virgin board (sub-segment of
paper board)

JKPL: Market Position

• Successful acquisition of ailing Sirpur Paper Mills (SPM)
• JKPL getting a majority stake of 76.4% in SPM for Rs 7.82 billion
• Incremental capex: Rs 4.0 bn to rebalance and improve
efficiency of power plant
• Acquisition will add capacity of 135 kt
• WPP, coloured, and maplitho paper
• Inrease exposure to southern and eastern India.
• Favourable demand scenario
• No significant capacity addition expected in the near term
• BILT operating below capacity
• Firming realisation expectations
Overall, JKPL is well positioned to leverage its established presence
and grow revenue at a healthy pace over the medium term: 4+

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JKPL: Operating Efficiency

Sustained improvement in operating efficiency JKPL’s operating margin is among
the best in the industry
• New-age plant, incorporating the latest technology
• Highly efficient in terms of inputs (wood/pulp, chemicals, coal, water) used per
tonne of paper
• E.g. Coal consumption declined by over 60% in the past few years
• New PM5/PM6 plants (200-kt) are the most cost-effective paper mills in India
• Yield a plant level EBITDA of over 30%.
• The cost benefits per tonne of paper produced have sustained
• Plants are now fully utilised with greater than 100% capacity utilisation
• Efficient working capital management
• Profitability uptrend due to ramp-up of these units over past few
years
• Brownfield capex will help increase operating efficiency
• Improve pulp integration
• Favourable Telangana Govt Policies policies, such as availability of raw material including
wood and coal at concessional rates, capital subsidy, and tax exemptions.

JKPL: Operating Efficiency

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JKPL: Operating Efficiency

JKPL: Operating Efficiency

• Risks Remain: Related to Capex implementation and turning
around SPM
• Implementation risks: SPM, sick unit; timely turnaround and ramp-up in operations
• 200 kt capacity expansion is a fairly large capex, given balance sheet size.
• Brownfield and staggered nature of capex and execution track record mitigate risks.
• Susceptibility to cyclicality inherent in the industry
• Long gestation period in capacity addition; Lead time in raw material generation
• During the 2014 downturn, scarcity of raw material impacted profitability
• JKPL has improved availability of hardwood near its plants through its farm forestry programme
• Exposure to sharp increase in hardwood prices
• Efficiency related improvements -> Periodic cap. upgrades->
Regular Capex
• Vulnerability to impact of latent industry capacity coming on-
stream
• Restitution in currently non-operational capacity will have impact
• Production ramp-up will affect the demand drivers for WPP players as well as hard-wood (the
key raw material), with consequent impact on cost and profitability
Overall, Superior Operating Performance, on the back of expanding
capacity; but potential risk exposure remains: 4 ~ 4+

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Risk Assessment Sheet: JKPL: SAMPLE

Risk Factor Risk Remarks

Grade
(1 to 6)
INDUSTRY RISK: é Steady demand growth expected, given increasing
thrust on education, industrial and economic growth;
PAPER
3+ ~ 4- é Retail growth likely to drive packaging paper demand
é Plastic ban by Govt. of Mah. Could further spur
demand
é WPP prices to remain firm over medium term – China
ban on waste paper; high global pulp costs
é High entry barriers
ê High fragmentation in WPP and Packaging segments
ê Increasing Raw material scarcity likely to impact
performance
ê Inherent cyclicality- susceptibility to economic cycles
MARKET POSITION +
4~4 JKPL is well positioned to leverage its established
presence and grow revenue at a healthy pace over
the medium term
OPERATING EFFICIENCY
4 ~ 4+ Superior Operating Performance, on the back of
expanding capacity; but potential risk exposure
remains
OVERALL BUSINESS RISK
4 ~ 4+
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Case 2: Rama Pulp & Paper (RPPL)

Internal Business Risk Assessment

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Rama Pulp & Paper (RPPL)

• Set up in 1980. In 1993, Mr Akash Kagliwal and entities in which he held
stakes bought 51.41% of RPPL's equity. The company manufactures WPP,
absorbent paper, and special-grade paper
• WPP and absorbent paper capacity of 50 tonne per day (tpd)
• speciality paper capacity of 16 tpd in Vapi, Gujarat.
• In fiscal 2017, the company started its LABSA manufacturing plant in Vapi.
• In Oct 2017, RPPL announced scheme of arrangement and amalgamation
between Nath Paper & Nath Ind. & Chem and RPPL. Approved in 2019.
• About NPPL & NICL
NPPL (set up 1975) by Mr Akash Kagliwal, manufactures high-strength
core board and thermal grade paper and caters to a pan-India clientele.
• Aurangabad-based; Capacity to manufacture 50,000 tpa of paper
• NICL, (set up 1978) by Mr Akash Kagliwal manufactures and trades in
industrial chemicals. The key product, sulphuric acid, is used in
pharmaceuticals, dyes, and textiles.
• It also has a 2-megawatt captive thermal power plant

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Rama Pulp & Paper Ltd (RPPL) – Market Position

• Diversified product profile
3/ 3+
• Diversification: 2016: Linear alkyl benzene sulphonic acid (LABSA; a surfactant, widely used in
detergents)
• The paper segment contributed 73% of the total revenue
• Of which paper used to manufacture laminates accounted for 46%
• Other specialty offerings (tissue paper, carbon-base paper, thermal paper, pleating paper, and wax
match tissue paper) made up the balance.
• Specialty paper: 5% of paper volume produced in India (Around half of industry requirement met thru’ imports)
• However, demand for specialty paper is strong, given its diverse end uses. RPPL being an established player in the
niche segment, stands to benefit from steady demand
• Chemical division contributed around 20%.
• Contribution of low-margin traded goods declined to 7% in FY 2019, from around 50% in fiscal 2010.
• Capability to manufacture a variety of types and grades of paper—
of 18 -120 gsm— ensuring effective capacity utilisation
• Relatively Small Player, but niche : ~ Rs. 100 cr sales vis-à-vis JKPL
(~2500 crs); Merger likely to increase sales to Rs. 350 cr range
• New entrant in the LABSA segment
• High competition from incumbent players persists. Demand for the
surfactant has declined owing to intense competition
• Growth may remain muted. Ability to manage competition and grow business
– critical.

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Rama Pulp & Paper Ltd (RPPL) : Operating Efficiency

• Relative Small Size, but growth post merger
• Limited Integration
3
• No captive power (till recently) – Dependence on grid power
• Vulnerability to raw material prices
• Import intensity => Forex exposure/susceptibility
• Good/Prudent working capital management => rein on costs
(track record)
• (2017): Merger with Nath Paper& Pulp Ltd (NPPL) and Nath Ind.
Chem Ltd (NICL) - potential benefits post merger
• Companies present across the value chain of paper and specialty
chemicals
• NPPL: Hi-strength core board and thermal grade paper; Capacity for
50,000 tpa; Pan-India customer base.
• NICL: Manufactures/trades H2SO4 . Also 2Mw captive thermal power
plant.
• NICL’s H2SO4 output and captive power plant => backward integration
• RPPL’s WPP output will be used by NPPL for making coating paper.

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Risk Assessment Comparison: Rama Pulp & Paper

Risk Factor Risk Grade Remarks

(1 to 6)

INDUSTRY RISK:

PAPER
3+ ~ 4

MARKET POSITION Diversified but small sized player

3/3+ Long track record
Niche operations provides stability
Specialty chemicals diversifies revenues and enhances
scale & size
OPERATING EFFICIENCY Size related disadvantages and limited integration
3 Prudent operations/WC management
Merged entities can strengthen performance
Backward integration benefits thru merger
OVERALL BUSINESS RISK
3/3+

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Company Analysis & Pegging the Risk Score/Level

ØUnderstanding
Ø The Business – the basic building blocks
Ø How do industry players really make money ?
Ø Key success/risk factors / issues SPECIFIC to
industry
ØDescription/ Characterization of the strengths
ØPicking out the key sensitivities
Ø Description/ Characterization

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Company Level Analysis of Risk

Ø Understanding
Ø Start with facts & figures
Ø Get a sense of competition and the bases of competition. Figure
out what the keys to dominance are
Ø Quality? => Technology Access? Process?
Ø Brand? => Reputation? Promotion? Quality and perception
Ø Positioning/Segment? => Mass? Premium? Niche? Commodity?
Ø Price? => Scale? Deep pockets? Distribution? Costs?
Ø Cost & Efficiencies? => Technology & process? Location? Access? Supplier networks
Ø Diversity of presence => P-M Segments and their characteristics
Ø …
Ø Get a Sense of Relativity
Ø Examine Trends
Ø Description/ Characterization
Ø Picking out the key sensitivities- Positive and Negative
Ø Trends in the data – Past is always a good starting point
Ø Are there good reasons why history would repeat or not repeat?

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Conceptualizing Overall Company Risk

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FINANCIAL RISK

5
LOW

4
3
2
HIGH

HIGH LOW

BUSINESS RISK

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Market Position

The firm’s current market power

and the ability to sustain or
Market Position improve it
• What are the current market
strengths? How would you
characterize/ qualify them?
Product Market
• What do they derive from?
• What are the key sensitivities?
• Vulnerabilities (and impact)?
• Sources of potential upsides
(and impact)?

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Operating Efficiency

Logistics
& Input Related Risks
Supply Chain Efficiency

Ø Ability to deliver
quality goods/services
Operating Efficiency at competitive prices
Ø Risk of potential
disruption

Environmental Cost Structure

Factors

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Risk Description / Characterization

Try a Value Statement Approach

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Value Statement for factor – Extent of Competition

6 (Excellent) 5 (Good) 3 & 4 (Average) 2 (Below average) 1 (Poor)

The industry has a Industry is Industry has a Highly Extremely

monopoly structure , characterised by a fairly fragmented fragmented competitive
with the prospect of few large players structure. Moderate industry. industry, with a
new entrants in the accounting for the entry barriers in the Processes are very near absence of
medium term being bulk of market form of easily replicable entry barriers ,
unlikely. share. Capital technology/ capital leading to in the form of
investment investment. Fair presence of large, investment/
involved is likely extent of value cost-competitive technology etc.
to discourage addition restricts unorganised No player is
significant easy access to the sector/ capable of
increase in unorganised sector. Significantly building a
competition in the / Significant threat lower cost of significant
medium term. from imports. imports render market share in
Absence of domestic the industry.
serious threat producers Majority of
from imports. unviable. players in the
industry are
loss making.

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Value Statement for factor – Brand Equity

Consumer Durables
Marks Attributes
6 Extremely strong international brand in consumer durables. Brand is
(Excellent) associated with the highest international quality standards.
5 Among the strongest domestic brands in consumer durables, strong
(Good) international brand. Brand has a strong quality image. Proven to have high
brand recall based on marketing surveys.
3&4 Fairly strong regional brand with an established market presence in
(Average) consumer durables. However, brand extension across varied product lines/
regions remains to be demonstrated.
2 Small scale/ state level manufacturer of domestic appliances with a weak
(Below average) brand name. Ability to invest in further brand building is severely restricted.
1 Assembler of unbranded items in the grey market for consumer durables.
(Poor) Manufacturer of unbranded radios, etc

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Value Statement for factor – Availability of Raw

Material
Cotton yarn
Marks Attributes
6 Proximity to cotton growing area . Company purchases cotton in bulk at the
(Excellent) commencement of year, yet has the liquidity to purchase cotton in retail market
when price is favourable. Highly experience in cotton textile business. Regarded as
best in industry with regard to cotton procurement.
5 Cotton procurement skill marginally lower than above category . Relationship
(Good) with suppliers/ cotton marketing federations strong, but not as well established as
above companies. Cash rich nature enables immediate purchase of cotton during
favourable price movements.
3&4 Cotton procurement is not regarded as a strength. While experienced in the
(Average) business, non availability of cash could restrict flexibility to source cotton as and
when desired.
2 Insufficient expertise in judging price movements in the market, leading to
(Below inability to have optimal stocking. Availability of cash to make spot buying
average) decisions extremely restricted.
1 Spinning operations have been halted owing to lack of cotton supply.
(Poor)

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Value Statement for factor – Experience in the

Industry
6 (Excellent) Top management is vastly experienced in the industry. Senior management
personnel are considered as among the most knowledgeable in the industry.
Promoter group/family has been engaged in related fields for several years too.

5 (Good) Top management has put in several years in the industry. Senior management
comprises highly experienced personnel.

3&4 (Average) Top management, while fairly experienced, has not put in sufficient years to
witness a number of business cycles in industry . Top management has a
balance of highly experienced and inexperienced personnel. .
2 (Below Start-up with promoters having limited industry experience.
average)
1 (Poor) Startup company with Promoters having virtually no prior experience in the industry

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“Value Statement” for factor – Current Ratio

Current Ratio: (Cash & Bank balances + total receivables + inventories + current assets
related to operations + other current assets) / (Working capital loans from banks + other short
term loans + current liabilities and provisions)

Current Ratio Score

Below 1.07 1
1.07 to 1.13 1.5
1.13 to 1.19 2.25
1.19 to 1.25 3
1.25 to 1.30 3.75
1.30 to 1.40 4.5
1.40 to 1.50 5.25
Above 1.50 6

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Case 2: Tyre Industry

Apollo Tyres Limited (Apollo)

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Tyre Industry
• INR 600 Billion Market - OEMs/ Replacement: ~ 90% Domestic
• OEM Demand Drivers
• Vehicle production
• Segments: Truck & Bus (T&B); Personal Veh.(PV); 2-Wheeler; Off
Highway (OHT)
• Replacement market (~62 % of Revenues in 2019)
• Economic growth, usage characteristics, and replacement cycles
• Higher realisations than OEM
• Both OEM and the replacement market are cyclical
• FY 2020
• OEM demand likely to decline by 24-26% - production cuts by OEMs.
• Replacement demand likely to remain flat - muted freight demand; lower private
demand
• EBITDA margins expected to decline in FY 2020 due to lower capacity utilisations.
• Tyre demand and operating margin was expected to revive in fiscal 2021 in line
with revival of OEMs *
• OEM demand expected to grow at 9-11% in fiscal 2021 over a low base

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Tyre Industry
• Fair concentration
• 3 players: 64%
• 6 players : Over 80% of the market

Source: Crisil Research

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Tyre Industry
• Radialisation in T&B tyres
• Higher-than-expected pace
• Key revenue driver
4 ~ 4+
• Low penetration of radial tyres in the country - Indian players are
undertaking large capacity additions.
• High demand growth of 6-8% expected over the medium term
• Improvement in industrial GDP
• Push towards infrastructure development
• Better freight availability
• Revival of rural demand.
• Raw material intensive - Profitability is susceptible to volatile input prices.
• Although the industry is fairly consolidated, pricing flexibility is limited
• Intense competition in the form of low-cost radial tyres for the T&B
segment imported from China and other Southeast Asian countries
• FY 2018, government imposed an anti-dumping duty on T&B radial
imports from China for 5 years.
• Increased the cost of Chinese tyres by 6-8%
• Welcomed by domestic tyre manufacturers.

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Apollo Tyres – Overview

• Incorporated in 1972
• Manufactures automotive bias and radial tyres, and tubes.
• Plants - Kochi; Vadodara; Pune; Chennai; Hungary
• Leading brands in the T&B, light truck - caters to both OEM and
replacement market.
• In Feb 2013, Apollo sold South African operations (Dunlop Tyres;
purchased in 2006 for Rs 2.9 Billion) to Sumitomo Tyres for a
consideration of USD 60 Million.
• In May 2009, Apollo acquired Vredestein, a subsidiary of Amtel-
Vredestein NV, incorporated in the Netherlands, for EUR 40 Mn
• Vredestein has a manufacturing unit in Enschede, near Amsterdam, with
a capacity to manufacture 5.5 Million tyres p.a.
• Produces premium, high-speed passenger car radial (PCR) tyres,
collapsible passenger car tyres, and agricultural tyres.
• Two brands, Vredestein and Apollo, in the premium and mid-range
segments, respectively.
• Listed: Promoters ~ 40% share

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Apollo Tyres – Business Risk Profile

• Leading manufacturer of tyres for T&Bs, light commercial vehicles (CVs), and tractors ,
passenger car radials (PCR)
• Strong Market Position in T&Bs (incl light CV)
• Maintained its leadership position in the T&B segment (which is ~ 50% of domestic market)
• Market leader - market share of 25%.
• T&B segment –– 43% of firm’s revenues in FY 2019
• Well established in the PCR segment too
• Established presence and wide distribution network
• Pan-India distribution network comprising 5,000 dealerships
• Exclusive outlets that operate under the Apollo Tyre World, Apollo Radial World, and Apollo
Pragati Kendra brands.
• Vredestein has an established brand, healthy clientele, robust manufacturing set-up, and
strong distribution network in the European PCR market.
Strong position in the domestic market: Well-poised to counter pressure from Chinese
imports and increasing domestic competition driven by established presence, strong
operating efficiency, and wide distribution network. Market position will improve
further over the medium term, as production at the Chennai and Hungary facilities has
been ramped up and the Andhra Pradesh (AP) facility becomes operational.
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Apollo Tyres – Geographical Spread

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Apollo Tyres – Business Risk Profile

• Operations across India and Europe
• Diversified product mix, which support the revenue profile
• Strong foothold in the domestic T&B segment; Presence in the European PCR market
through Vredestein.
• In FY 2019, A-Pac, the Middle East, and Africa accounted for around 60% of revenue
• Vredestein accounted for 25% (refer Chart 2)
• Remaining revenue came from operations in the US
• The replacement market significant portion (78%) of Apollo’s consolidated revenue
• Successful integration of Apollo’s operations with those of Vredestein has enhanced
the diversity in revenue in terms of geographic reach and product segments.
• Bulk of Indian revenue comes from the T&B segment. Vredestein primarily in the
premium and high-speed PCR segment in Europe; helped Apollo upgrade its PCR
technology.
• 2006, Apollo acquired Reifencom GmBH, a German tyre distributor company, for
EUR 45.6 Mn.
• Reifencom, with its 37 stores across Germany, has helped Apollo improve its mix of distribution
channels in Europe, and increase visibility of Apollo’s brands in the offline and fast- growing online
retail space.
Diversified revenue profile, driven by presence in different geographies and segments -
Will continue to shield the business from unfavourable conditions in any particular
segment/ geography and provide stability to cash flows.

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Apollo Tyres – Product-Market Spread

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Apollo Tyres – Business Risk Profile

• Business remains vulnerable to the cyclicality in the tyre industry
• Fluctuating demand from end-user CV players, especially T&B
• Key Dependency - economic growth and infrastructure development
• Any slowdown in the economy will impact the tyre industry, particularly in
India.
• The outbreak of Covid-19 across the world will impact demand over the next
several months
• Raw material cost accounts for more than 60% of the total operating cost
• Price of natural rubber depends on global demand, area under cultivation, and
yield factor
• Prices of carbon black and other materials are based on crude oil prices –
almost monopolised Indian market (Philips carbon)
• While Apollo is able to pass on significant raw material price fluctuations
to consumers, this occurs with a lag
• Operating performance is likely to remain susceptible to cyclicality in the
tyre industry and volatility in raw material prices over the medium term.
• Op. margin reduced to 11.5% and 11.6% in FY 2019 and 2018 (from 14.3%
(2017) and 16.9% (2016) because of an uptick in rubber prices and decline in
profitability of the European operations as the Hungarian plant ramped up.

Continued exposure to cyclicality in the tyre industry and

vulnerability to fluctuations in raw material prices
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Apollo Tyres – Input linked Volatility

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Apollo Tyres – Project Risk

Implementation risk in the expansion projects
• Company undertaking large capacity expansion in AP
• 50% funded through debt
• Commissioned a new facility in Hungary recently
• Exposure to project implementation risks, particularly
in Hungary, which is a new geography
• Taking time to ramp up, impacting profitability
• Apollo plans to defer some of the domestic capex to
subsequent years to conserve liquidity in the current
uncertain environment.
• Timely commissioning and stabilisation of the new
capacities will be key risks.

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Risk Assessment Summary: Apollo Tyres

Risk Factor Risk Grade Remarks

(1 to 6)
Industry Risk: Tyres é Reasonably high industry concentration
é High entry barriers
4 ~ 4+ é Strong Demand Outlook
ê Inherent Cyclicality
ê Margin Volatility due to input side risks

é Strong position in the domestic tyre industry,

Internal Business with leading market share in the truck and bus (T&B)
Risk: Tyres segment
5 é Diversified revenue profile, driven by presence in
different geographies and segments

ê Exposure to cyclicality in the tyre industry and

vulnerability to fluctuations in raw material prices
ê Implementation risks in expansion projects

Overall Business Risk 5-

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