Chennai: In the eighties it was considered a doubtful investment. If not that, a technological gamble. Today, the company has readied itself for a suitable buy or a tie-up with an Indian or a multinational company.

The company in question is the Rs 596-crore-turnover Tamil Nadu Newsprint and Papers (TNPL), which rolls out paper out of bagasse. The 1.8-lakh-tpa capacity (newsprint and printing and writing paper [PWP]) company plans to hike the same to 3.3 lakh tpa by 2003.

TNPL is rebuilding its two Voith paper machines at an outlay of Rs 105 crore. This is in addition to the Rs 12.50 crore spent recently on debottlenecking the machines. The rebuilding exercise will increase production by another 50, 000 tpa and the balance 1 lakh tonnes should come from takeovers or tie-ups, or again through expansion.

If one looks at the present state of Indias paper industry, the last option is most likely to happen. "The takeover choice in this part of the country is very limited, or even nil, as most of the likely targets do not have the minimum economic scale," says TNPL director (finance) A Velliangiri.

In fact this was the reason why the company lost interest in the Karnataka-based Mandya Paper Mills and another factory in Pondicherry. The only big-sized mill that may come up for sale in the near future is the Kerala-based 1 lakh-tonne Hindustan Newsprint, a wholly-owned subsidiary of Hindustan Paper Corporation, a central PSU. The Centre has called for consultants to start the disinvestment process in Hindustan Newsprint.

While these are future plans, TNPL is mercilessly cutting costs to make more profits a prudent move at a time when the industry is on a downslide. Cost cutting assumes more importance for TNPL, as the Centre has doubled the excise duty to 16 per cent for the paper manufactured out of non-conventional materials.

Some of the cost-control measures taken during the previous years are yielding results now. For instance, the company commissioned 24 mw turbo generators to become surplus in power. TNPL has started wheeling 2 lakh units per day to the grid at Rs 2.25 per unit. On the production side, TNPL, last year, increased its in-house hardwood pulp production to 25,000 tonnes an increase of 67 per cent. Happy with the savings in pulp imports, the company intends to hike the pulp production to 110 tpd.

Similarly, the company has reduced high cost imports of chemically-treated mechanical pulp used in the manufacture of newsprint to 19 per cent. The installation of wet-lap machine at an outlay of Rs.9 crore not only eliminated pulp shortages but made TNPL surplus enough to sell 670 tonnes of pulp in the open market.

The company is also planning to reduce its steam cost to Rs 440 per tonne this year from Rs 480 per tonne, by using agro-waste to burn its boilers. On the water usage front, the company has achieved a drastic reduction in its water consumption during the past five years from 179 KL per tonne of paper produced, TNPL today consumes just 106 KL.

Finally and more importantly, TNPL has been maintaining its depithed bagasse cost at Rs 1,050 per tonne for four years despite an increase in input costs. The company has recently concluded an agreement with Sakthi Sugars to source 3 lakh tpa of bagasse, nearly 30 per cent of the companys needs, at an attractive rate.

On the finance side, too, TNPL has been reducing its interest payouts by going in for cheaper funds like FCNRB loans and commercial paper. Last year, it prepaid an IDBI loan to the tune of Rs 30 crore and also one installment of the World Bank loan on back-end basis, totalling to Rs 16.31 crore. In addition, a tight leash is held on its debtors position despite the Rs 103-crore increase in sales last fiscal.

"Last year our average cost of debt was 8.3 per cent and it will be less than 8 per cent this fiscal," says Velliangiri. The comfortable cash flows of the last two years enable the company to meet all its expansion costs out of its reserves. Such cost compression measures will help the company to close this financial year with a decent profit, though not comparable to the bumper profit of Rs 76 crore made last fiscal.

The pressure on the bottomline is due to the cyclical nature of the paper industry. Since the beginning of this calendar year, paper prices were under pressure. More so is in the case of newsprint. As a result, the companys production mix is very much slanted towards PWP. "The ratio between newsprint and PWP production is 80:20," says Velliangiri.

Speaking about the price trend he says: "From $710 per tonne in January, the newsprint prices has come down to the present rat of $ 460 per tonne. And this trend will continue till the end of this fiscal." But the recent announcement by an official in the commerce ministry to recommend an increase in the import duty to 10 to 20 per cent from the current rate of 5 per cent gives some comfort for newsprint manufacturers.

On the other hand, pressure on PWP prices is not as acute though the product experienced a price drop of Rs 2,500 per tonne since the beginning of the year. The sorting out of the quality issues has enabled the company to focus on selling branded products. TNPL has increased its copier paper sales to 1,200 tpm and aims to touch 3,000 tpm soon. This will be facilitated by adding one more automatic paper cutting line with 100 tpd capacity.

Though the major market for TNPL Copier is in the south, inroads into the northern markets have been made in the recent times. Similar is the case with the companys office stationery TNPL OS 2000 and other user ready products.

The domestic market apart, TNPL exports around 200 tpm of this product to Australia, to be sold by major office stationery retail chains like Spicer. "Our product prices are comparable to other local brands made from wood pulp," says Velliangiri. Despite the sluggish international market, the company hopes to repeat last years export volume of 25,000 tonnes.

On the bourses, the Rs 69-crore equity-based companys scrip changes hands for Rs 27 per tonne after touching a 52-week high of Rs 46. One of the reasons stated by analysts for poor valuations of the companys scrip, despite its good operational performance, is the 35-per cent stake held by the Tamil Nadu government.

The state government, which was supposed to have reduced its stake to 26 per cent long back, kept postponing it due to poor valuations. The other shareholders are IDBI (35 per cent), the public (28 per cent) and others (2 per cent).

Loaning $75 million in 1995 when the company doubled its capacity, the World Bank laid a condition that the government should bring down its stake to 26 per cent within a year of TNPL commissioning its second plant. The poor stock prices made the state government to postpone selling its stake. Recently, the government has got the World Banks permission to postpone its divestment till 2003.

also see : The gamble that paid off well