January 09, 2013
A 34 Mohan Cooperative
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Jute Industry
Jute plant Raw jute
Sacking jute Hessian jute
Food grain bags Shopping bags, Decorative items
Major jute companies
Revenue Revenues, EBITDA EBITDA, 5 EBITDA PAT
Market Cap. EV/EBITDA (FY12) 5 Yr CAGR (FY12) Yr CAGR Debt/MK Margin Margin
Company Name Ticker (USD mn) (x) (USD mn) (%) (USD mn) (%) Cap (%) (%) (%) EPS
Birla Corporation Ltd (#) 500335 378 5.9 38.0 10.9 6.6 NM 59.0 17.5 18.4 0.61
Cheviot Co. Ltd. 526817 28 3.2 58.0 12.9 7.7 8.1 10.6 14.0 9.4 1.26
Gloster Limited 590085 19 4.2 60.6 - 6.4 - 54.6 12.5 5.6 1.42
AI Champdany Industries Ltd 532806 8 6.9 76.8 9.8 4.2 8.6 259.9 5.9 -0.1 0.01
Ludlow Jute & Specialities Ltd. 526179 6 2.2 55.2 16.4 2.5 28.4 5.1 5.1 2.2 0.09
# For Birla - figures of Revenue, Revenue CAGR, EBITDA, EBITDA margin and EBITDA CAGR are for the jute segment
Manjit S Kalha Rohit Anand, CFA (ICFAI)
mk@gbhpartners.com ra@gbhpartners.com
(+91) 9810023768 (+91) 9811941920
-Please Refer To Important Disclosures On The Last Page Of This Report-
HORIZON RESEARCH
INTRODUCTION
In this report, we study the global jute industry. The size of the global jute industry is ~USD 1.75
billion, of which India accounts for ~USD 1.25 billion or 70% of jute produced. Globally there are
12 publicly traded companies engaged in the jute business of which 5 disclose segmental
information on contribution from jute. All of these 5 companies are based out of India.
Cheviot (BSE: 526817) and Gloster (BSE: 590085) are the two major standalone jute companies
for investors to participate in the dynamics of jute industry. The jute segment contributes around
8% or USD 38 million to Birla Corporation’s (BSE: 500335) overall revenue of USD 449 million
(other segments include Cement, which contributes 82.9% or USD 400 million).
In order to support the farming and manufacture of raw jute and jute products, the Government of
India introduced The Jute Packaging Materials Act (JPMA) in 1987.1 The act made it compulsory to
use jute bags for packaging food grains and sugar (in pack sizes greater than 50 Kg). As a result,
Food Corporation of India (FCI), state governments and sugar millers are major buyers of jute
bags in India.2
In India ~84% of the total jute produced is used for packaging food grain with no other major use
for jute. A limited end user market prevents farmers from increasing the supply of raw jute despite
the yearly increase in raw jute prices. In most years the Government of India tends to dilute
(reduction on compulsory 100% usage) jute packaging norms based on raw jute production data.
For Jute Year 2012-13 (1st July 2012 to 30th June 2013), the Government of India has approved
mandatory packaging of 90% of the food grain production and 40% of the sugar production in jute
bags.3
Table 1: Demand for jute bags
Particulars FY08 FY09 FY10 FY11 FY12
Food grain production (million MT) 230 234 218 236 252
Sugar production (million MT) 26 15 19 24 26
Bags for food grain (‘000 MT) 811 820 757 899 960
Bags for sugar (‘000 MT) 208 123 95 99 107
Total (‘000 MT) 1,019 943 852 998 1,067
Source: Horizon Research, National jute board
1
http://jutecomm.gov.in/acts1.htm
2
The Food Corporation of India was setup under the Food Corporation Act 1964. The corporation provides price support to farmers,
distributes food grain under the public distribution system and maintains buffer stocks of food grain to ensure National Food Security.
3
http://pib.nic.in/newsite/erelease.aspx?relid=90684
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HORIZON RESEARCH
OVERVIEW OF THE JUTE INDUSTRY
Jute fibre is extracted from the stem of the jute plant and has a golden & silky texture. Jute is an
environmental friendly fibre and is renowned for its 100% bio-degradable & recyclable properties.
In India approximately 84% of the total jute produced is used for storage and packaging purposes.
Raw jute fibre is woven together to produce jute bags. Jute bags are ideal for storing food grain as
they allow air circulation, which ultimately preserves the freshness of food grains.
The single most important synthetic substitute for jute is polypropylene (plastic bags). Plastic bags
have a negative impact on the environment which has caused environmentalists to promote use of
natural and bio-degradable products such as jute. The price of a synthetic bag is ~INR 12 per kg
compared to INR 28 per Kg for a jute bag.
Production
Worldwide raw jute production marginally increased by 1.3% from 2.8 million metric tonnes (MT) in
2003 to 3.1 million MT in 2011. This was mainly due to slight increase in yield by 1.9% from 2.1 MT
per hectare to 2.3 MT per hectare. Area under cultivation has declined by 0.6% to 1.3 million
hectares.
India and Bangladesh hold a dominant position in the world raw jute industry contributing 94% (or
2.9 million MT in 2011) of the overall total production. India is the world’s largest raw jute producer
with 62% share (or 1.9 million MT) in volume terms. Bangladesh has production share of 32% (or
990,000 MT) and China is the third largest producer with 2.4% share (or 75,000 MT). Uzbekistan,
Nepal, Vietnam, Myanmar, Zimbabwe, Sudan, Pakistan and Thailand also produce jute in small
quantities (~3.6% of the total raw jute production). The world’s raw jute production had declined
by 8% to 2.6 million MT in 2004 and 5% to 2.7 million MT in 2008. This has occurred due to a
decline in jute cultivation area in India by 8.8% in 2004 and 6.3% in 2008 respectively.
We estimate a decline in global raw jute production for FY13 to ~2.7 million MT from ~3.0 million
MT in FY12 due to decline in raw jute production in India. For FY13, the Government of India has
estimated the raw jute production to be around 1.6 million MT (from 1.8 million MT in FY12).
Consumption
The worldwide jute consumption was ~2.8 million MT in 2010 and increased from 2.7 million MT
in 2006. India consumes 1.6 million MT which accounts for 57% of the world’s consumption.
Together, Bangladesh, China and Pakistan have a 15% share in overall global consumption.
Figure 1: Worldwide jute production
Source: Horizon Research, FAO
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Exports
World jute exports (including both raw jute and processed jute4) are around 954,300 MT.5
Bangladesh has a dominant position in the jute export markets with 695,600 MT (~73%) goods
exported. India is the second largest exporter of processed jute after Bangladesh, exporting
163,500 MT (17%) of the world’s jute export. Bangladesh exports ~83% (695,600 MT) of their
production compared to India which exports ~10% (163,500 MT) of their production.
China, Pakistan and India together import 294,000 MT (70% share) of raw jute and are the three
largest importers of raw jute. Turkey, Iran, Syria, U.S and Belgium are the major importers of
processed jute with over 50% share (~326,400 MT).
Table 2: India and Bangladesh position in world jute industry (2010)
Particulars India Bangladesh World
Production (MT) 1,620,000 839,600 2,629,400
% of world’s production 62 32
Consumption (MT)6 1,627,500 140,000 2,847,300
% of world’s consumption 57 5
% of their production 100 16
Raw jute export (MT) - 290,600 298,400
% of world’s raw jute export - 97
Processed jute goods exports (MT)7 163,500 405,000 655,900
% of world’s jute goods exports 25 62
Overall exports (MT) 163,500 695,600 954,300
% of the total production 10 83
% of the world’s exports 17 73
Source: Horizon Research, National Jute board
4
Processed raw jute into good like hessian, sacking, carpet backing cloth, yarn and jute diversified products (included in others).
5
Overall is combined figures of raw and processed jute
6
Consumption and export is higher than total production because of the opening jute stock
7
Processed raw jute into good like hessian, sacking, carpet backing cloth, yarn and jute diversified products (included in others).
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HORIZON RESEARCH
INDIAN JUTE INDUSTRY DYNAMICS
Production
India’s raw jute production reported a decline from 2 million MT in FY03 to 1.8 million MT in FY12.
The decline was due to a drop in cultivation area from 849,000 hectares to ~790,000 hectares.
Table 3: India’s raw jute (million MT)
Particulars FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E
Opening stock 0.3 0.6 0.6 0.3 0.1 0.4 0.4 0.1 0.2 0.4 0.6
Production 2.0 1.6 1.4 1.5 1.8 1.8 1.5 1.6 1.8 1.8 1.6
Import 0.2 0.1 0.1 0.1 0.1 0.1 0.0 0.1 0.1 0.2 0.1
Total supply 2.4 2.3 2.0 1.9 2.0 2.3 1.9 1.8 2.2 2.4 2.3
Domestic consumption 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.2 0.2
Mill consumption 1.7 1.6 1.6 1.6 1.5 1.8 1.6 1.4 1.6 1.7 1.7
Total demand 1.8 1.7 1.8 1.8 1.6 1.9 1.8 1.6 1.7 1.9 1.9
Closing stock 0.6 0.6 0.3 0.1 0.4 0.4 0.1 0.2 0.4 0.6 0.4
Source: Horizon Research, Jute commission of India
West Bengal, Bihar and Assam together contribute ~94% of India’s raw jute production. West
Bengal is the largest raw jute producing state contributing more than 75% of overall production.
Approximately 30% of India’s raw jute production comes from two districts of West Bengal:
Murshidabad and Nadia. As per our estimates, a deficient monsoon in Murshidabad and Nadia will
reduce overall jute production for FY13.8
The Government of India also regularly announces the Minimum Support Price (MSP) for raw jute,
in order to protect the farmers and mitigate their risk, which would occur if the jute prices decline.
MSP for raw jute of TD-5 grade (a tossa variety grown in Assam) increased at a CAGR of 16%
during FY08-13 from INR 10,550 per MT in FY08 to INR 22,000 per MT for FY13 (2012 crop).9
Figure 2: India raw jute- MSP Figure 3: Country-wise jute prices
Source: Horizon Research, World jute Source: Horizon Research, International jute study group
Cultivation
Raw jute is generally a rain-fed crop and is cultivated during the monsoon season. To increase
yield, the crop requires an appropriate amount of rain and sunshine. Raw jute is extracted through
the ‘retting’ process by bundling jute stems and immersing them in the running water for around
20 days. The process requires lesser time if the quality of jute is good. After the retting process,
the ‘stripping’ process begins where the non-fibrous material is scraped off the stem. Separated
8
http://www.wgc.de/pdf_data/en_jute-marketreport-09-2012.pdf
9
There are three major varieties of raw jute i.e. white, tossa and mesta raw jute (defined in cultivation section below)
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HORIZON RESEARCH
fibers are then washed, cleaned and dried under the sun and then can be used for further
processing.
There are three major varieties of raw jute i.e. white, tossa and mesta raw jute. White raw jute was
earlier used for making clothes for villagers and farmers and originated in poorer regions of India.
White raw jute is now used to make products such as yarn, twine and rope. Tossa raw jute is
silkier and much stronger than white jute. This extra strength makes it ideal for manufacturing
sacking bags. These two varieties are further classified into 8 classes (white – W1 to 8 and tossa –
TD 1 to 8) segregated on the basis of length, strength, fineness, and lustre. Mesta is a mix of
mesta plant and white jute and can be grown in an area where the climate is not appropriate for
producing white or tossa jute. Mesta has 6 grades M-1 to M-6.
Unit Economics
West Bengal farmers make a marginally better return from cultivating jute as compared to
cultivating paddy. In-spite of this higher return farmers are reluctant to increase jute production as
more than 84% of jute is used for storing food grain and sugar products leading to a concentrated
end user base. The farming community also believes that if not for the existing Government
mandate on compulsory use of jute, jute consumption would have been significantly lower.
Table 4: Unit economics - Jute and paddy in West Bengal (2011-12)
Particulars Jute Paddy
Total Cost (INR Hectare) 48,517 45,264
Yield (Qtls/Hectares) 28.3 44.1
Yield (Qtls/Acres) 11.3 17.6
Human Labour (INR/Qtls) 750 434
Bullock Labour (INR/Qtls) 88 47
Other Operational Cost (INR/Qtls) 270 231
Fixed Cost (INR/Qtls) 607 316
Total Cost (INR/Qtls) 1,716 1,027
Prices (INR/Qtls) 1,950 1,110
Total Cost (INR/Acres) 19,407 18,105
Total Income (INR/Acres) 22,055 19,560
Net Income (INR/Acres) 2,648 1,454
Return (%) 14% 8%
Source: Horizon Research, Department of agriculture
Types of jute and usage
Of the total raw jute production of ~1.6 million MT in 2010, 1.3 million MT was converted into
processed jute and the balance is remaining as stock with the various industry participants. There
are three major Jute product categories: sacking, hessian jute and carpet backing cloth (CBC).
This includes 922,500 MT of sacking products and 206,800 MT of Hessian products. ~84% of the
total jute goods produced are either sacking or hessian products and is mainly used for storage
purpose. CBC, Yarn and jute diversified products (JDP) have the rest of 189,400 MT.10 Of the total
processed jute ~90% is consumed domestically, rest is exported.
10
JDP include floor covering, hand & shopping bags, wall hangings, gift articles, decorative fabrics, canvas, deco fabrics, webbing,
matting, shopping bags, wrappers, wall coverings, decorative items, upholstery and home furniture
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HORIZON RESEARCH
Table 5: Jute varieties production and consumption (‘000 MT) - 2010
Particulars Sacking Hessian CBC Yarn Other Total
Production 922.5 206.8 3.6 123.4 62.4 1,324.7
% of total 69.6 15.6 0.3 9.3 4.7
Internal Consumption 880.4 182.9 1.0 80.3 62.4 1,207.0
% of total 72.9 15.2 0.1 6.6 5.2
Source: Horizon Research, Jute commission of India
Sacking jute is rougher and heavier cloth jute, used mainly for storing food grains such as wheat,
rice, corn, pulses and coffee beans. Hessian jute is made from finer grade jute and is lighter in
weight than sacking jute. This type of jute is generally used for storing fruits & vegetables and
product packaging (household furniture, couriers, etc). CBC is used for making carpets most of
which are exported. Other products mainly include canvas, deco fabrics, webbing, matting,
shopping bags, wrappers, wall coverings, decorative items, upholstery and home furniture.
Table 6: Export prices of hessian and sacking cloth
Particulars FY08 FY09 FY10 FY11 Dec’11
Hessian Cloth 1,123 1,292 1,758 1,949 1,857
(INR per 100 meters)
% Growth (5.1) 15.0 36.1 10.9 (4.7)
Sacking Cloth 2,757 3,525 4,435 5,075 4,804
(INR per 100 bags)
% Growth (8.7) 27.9 25.8 14.4 (5.3)
Source: Horizon Research, Jute commission of India
Jute processing industry
The Jute processing industry is one of India’s oldest industries. The first jute mill was started in
1856 in West Bengal. Around 0.26 million people are directly employed and more than 4 million
people are associated indirectly with the industry. There are 84 composite jute mills of which 64
are located in West Bengal.
Export
India exported ~14% of the total jute processed in FY11 (10% in FY10) and exports increased by
a CAGR of 15% in value from INR 10.5 billion in FY07 to INR 18.5 billion in FY11. During the same
period, export in volume grew by ~10% from 242,800 MT in FY07 to 351,160 MT in FY11. Of the
total exports, JDP comprises 19% (i.e. INR 3 billion). Hessian and sacking export has 52% share
(i.e. INR 9.6 billion) in FY11. During FY11, the export reported an increase of 116% YoY from INR
8,694 million in FY10 on account of increased export of hessian, sacking and others by 132%,
100% and 25%, respectively.
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HORIZON RESEARCH
Figure 4: India’s jute export (in value terms)
Source: Horizon Research, Jute commission of India
India faces competition from Bangladesh in the jute export market. Being an under-developed
country (WTO), Bangladesh jute exporters receive cash incentives of 10% on free on board (FOB)
prices from the Government of Bangladesh which makes their raw jute cheaper than Indian raw
jute (there is no such cash incentive available for Indian exporters) and gives them a competitive
edge over India.11 More than 25% of Bangladesh’s exports are subsidized. This combined with
lower labour costs than India makes their jute goods more economical than Indian jute goods. The
quality of Bangladesh’s raw jute quality is also better for making diversified jute products.
Conclusion
The Indian jute industry is heavily regulated by the Government of India. The Government decides
both raw jute production through the MSP mechanism, and, finished goods production by
mandating 'sacking bag' consumption levels. With demand for sacking bags constituting 70% (or
922,400 MT) of Indian jute consumption, the performance of jute companies is almost entirely
dependent on jute industry regulation. As Indian jute consumption patterns have remained
consistent (heavily biased towards Government mandated consumption of sacking bags) growth
opportunities for these companies are limited. Due to these factors we do not recommend
investing in jute companies.
11
http://news.priyo.com/business/2011/07/15/cash-incentive-rates-19-export-31800.html
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Appendix 1: Jute universe
Shares Market Cash from
Jute Revenue (% of Outstanding Close Price Cap. (USD Total Debt Cash (USD EV EV/EBITDA P/BV EV/Revenues Total Revenue operations (FY12) Gross Margin EBITDA PAT Margin RoA RoC RoE
Company Name Ticker revenue) (mn) (USD) mn) (USD mn) mn) (USD mn) (x) P/E (x) (x) (x) (FY12) (USD mn) (USD mn) (%) Margin (%) (%) (%) (%) (%)
Birla Corporation Ltd 500335 Jute: 38.5 (8.0%) 77 4.9 378 223 202 398 5.9 10.4 0.9 0.9 449.3 33 50.6 26.0 18.4 12.8 16.7 27.8
Cheviot Co. Ltd. 526817 Jute Goods: 54.7 (100.0%) 5 6.1 28 3 6 25 3.2 5.7 0.5 0.5 58.0 5 38.2 14.0 9.4 6.2 6.7 8.8
Gloster Limited 590085 Jute Goods: 62.0 (100.0%) 3 7.1 19 10 3 25 4.2 7.4 0.4 0.4 60.6 9 35.5 12.5 5.6 6.1 7.4 9.4
AI Champdany Industries Ltd 532806 Jute Goods: 73.5 (95.8%) 23 0.3 8 20 0 27 6.9 16.0 0.4 0.4 76.8 2 35.8 5.9 -0.1 2.3 3.1 0.0
Ludlow Jute & Specialities Ltd. 526179 Jute Goods: 55.4 (100.0%) 11 0.5 6 0 1 5 2.2 7.5 0.8 0.1 55.2 3 35.8 5.1 2.2 6.4 14.3 18.0
Cheviot Company (BSE: 526817)
Founded in 1897, Cheviot is the world’s largest standalone jute company in terms of market capitalization (USD 28 million). Cheviot jute
mills are located in West Bengal and have adequate flexibility to cater to both domestic and overseas markets. The company is primarily in
the production of traditional jute products (like sacking and hessian) and produced 47,769 MT of jute products in FY11. Their mills
specialize in producing jute products for the export markets which contribute ~40% to the company’s revenue of USD 54.7 million. They
had Gross margin, EBITDA margin and RoE of 38%, 14% and 9% respectively, in FY12. Based on FY12 numbers, the company trades at
3.2x EBITDA and 5.7x EPS.
Gloster (BSE: 590085)
Founded in 1890 and located in West Bengal, Gloster focus area is the domestic market, which constitutes more than 75% of the total
company’s revenue of USD 62 million. The company produced 49,244 MT of jute products in FY11. They had gross margin, EBITDA
margin and RoE of 36%, 13% and 9% respectively, in FY12. Based on FY12 numbers, the company trades at 4.2x EBITDA and 7.4x EPS.
Birla Corporation (BSE: 500335)
Incorporated in 1919 and located in West Bengal, the company has diversified from jute products manufacturing to cement, power
generation, PVC goods, auto trims and steel castings businesses. The company has jute manufacturing capacity of 38,000 MT. Jute
contributes ~8% (USD 38 million) of the company’s total revenues of USD 449 million in FY12. They had EBITDA margin of 17.5% from
the jute business in FY12. Based on FY12 numbers, the company trades at 5.9x EBITDA and 10.4x EPS (overall).
HORIZON RESEARCH
Rohit Anand, the Research Analyst who prepared this report, hereby certify that the views expressed in this report
accurately reflect the analyst’s personal views about the subject companies and their securities. The Research Analyst
has not been, is not and will not be receiving direct or indirect compensation for expressing the specific
recommendation or view in this report.
Rohit Anand, CFA (ICFAI), Analyst Horizon Research 2013
Manjit Singh Kalha, Managing Partner Marc Gabelli, Managing Partner
Anvesha Thakker, CFA, Partner Anand Rawani, Analyst
Important Disclosures
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