S. K.

Packaging: Offest Printing Opportunity

School Of Business Management, NMIMS, Mumbai

26 July, 2014

Aditya Marphatia (A057)

Andrew Simoes (E050)
Deboprasad Das (E013)
Divyanshi Pandey (E038)
Neha Anna John (A006)

It was a bright cold December morning in 2012 and Ravindra Kedar stood looking out of the
window in his Juhu apartment, watching the waves. They broke easily against the sand
hardening and strengthening the surface. Ravindra knew that this was the strongest point of S
K Packaging, his printing and packaging business: the solid foundation. However, he found
himself musing yet again on the fact that there were greater profits to be made in a more
advanced form of packaging: one that used offset printing on the boxes instead of the
printing. This form would lead to production of boxes that commanded higher margins. He
wanted to take the plunge while he was still young, but had some reservations and knew that
he needed to make a proper quantitative and qualitative evaluation before getting into it. He
had a meeting with the purchase manager of a large pharmaceutical company the next day.
The meeting was about the companys annual requirement for corrugated boxes with good
quality printing on the outer side for ten years commencing November 2013. He looked
forward to the meeting, for it was an old client and he had an excellent relationship with the
purchasing manager. However, he couldnt help but feel that he would need to make an
important business decision before getting into the details of the order.
Industry overview: Containers and Packaging Industry
The $3 billion corrugated packaging industry in India constitutes approximately 5% of the
global turnover in packaging. The industry had seen a healthy annual growth rate of 12% to
14% for the past 3 years and was scheduled to touch $15 billion by 20251 [See Exhibit 1 for
growth drivers in the packaging industry]. The packaging industry was highly fragmented
with over 22,000 players, an estimated 85% of which were MSMEs2. The industry may be
further divided into two sub-industries: Metal and Glass Containers and Paper Packaging.
Paper packaging accounted for about 22% of the turnover of the industry3. The industry was
characterized by intense rivalry to get orders as the players had little to offer in terms of
differentiation. In the face of this competition, relationship management played a crucial role
to generate orders. Being a commodity business, the companies try to achieve returns with
larger orders, thereby driving down per unit costs.

Source: Corrupack Website, http://www.corrupack.com

MSMEs is an abbreviation for Micro, Small & Medium Enterprises.
3
Source: Central Warehousing Coporation Annual Report, 2013-2014
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Business Foundation: The history of S K Packaging

S. K. Packaging had been setup 25 years ago by Ravindra. He wanted to provide a complete
packaging solution to companies across multiple industries. A majority of the companys
clients were pharmaceutical companies and pesticide manufacturers, while the rest included
fruit & vegetable wholesalers and automobile spare part manufacturers.
The company had product lines that could provide their clients the flexibility to handle
different types of products. Heavier materials were used for automobile gears compared to
the packaging of lighter products such as switches. The company manufactured boxes of type
2 ply, 3 ply, 5 ply, 7ply and 9 ply quality; 2 ply indicated that two sheets of paper were
corrugated to form the packaging material.
The printing on the boxes was mostly simple printing, a form of planographic printing
capable of printing only shades of blue and black on the boxes. Over 90 per cent of the orders
were serviced through simple printing, a facility available in-house. The remaining
percentage was serviced via offset printing, accomplished through outsourcing as the
necessary equipment and labour requirement was not available in-house.
In the last 5 years, Ravindra had shut down two out of his three factories in order to gain
more control over the quality, centralise all the operations at the Vashi unit and to cope with
labour problems. His revenue for the year ending 31st March 2012 was INR 55 million4. Over
the years, Ravindra had created a reputation for S K packaging of quality products, timely
delivery and flexible credit periods. He has maintained strong relations with local buyers and
hence was able to consistently generate orders over the years. However, he felt that growth in
his business had stagnated and that he relied to heavily on select clients.
Manufacturing Process: Corrugated boxes
The manufacturing of printed, corrugated boxes involves a number of steps. The steps are
automated but require workers to operate, sort and carry work in progress items from one
workstation to another. The end to end process flow takes 10 to 15 minutes for the
manufacture of one box. The boxes are first put through the forming process [see Exhibit 2]
after which simple printing is done. Alternately, in case offset printing is used, the printing is
first done on the paper after which the box is formed by the above process.
To achieve maximum utilization of labour and other resources, processing is done in large
batch sizes. The bottle neck in the process is the punching machine which requires a die
change in case of a different product line. All product lines follow the same process and
hence their overhead allocation is done on a per unit basis. The difference in the costs of the
products is mainly because of the quality and quantity of raw material used. Raw material
sourcing is done primarily from Vapi, Gujarat on a full truckload basis5. On an average, raw

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5

Source: Mr. Ravindra Kedar, Promoter, S. K. Packaging

A truckload is approximately 9.5 metric tonnes of paper
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materials are procured twice a week. Wastage constitutes 10% of the raw materials, which is
resold at one-third of its purchase price.
Labour
Three kinds of workers are employed at the factory: skilled, semi-skilled and unskilled. The
workers are gradually promoted from being an unskilled labourer to a skilled labourer as they
gain experience.
Offset Printing
Offset printing is the most common form of printing for non-packaging printing (books,
newspapers, magazines etc) approximately 40% of all print jobs use it. It uses three
cylinders to transfer the image onto the final layer. Because of the complexity involved in
handling the machine, it requires the employment of skilled labour. Hence, it calls for large
amount of investment in equipment and set up.
For the corrugated boxes, the outer side often requires to be printed for branding and to
specify certain information. Moreover, offset-printed packaging requires the printing to be
done before the forming process.
As of now, S. K. Packaging outsources offset printing while doing simple printing in-house.
Unlike simple printing, offset printing can also be used for colour and fine printing. An
additional benefit of offset printing is that it allows the packaging business to cater to big
industry houses such as the pharmaceutical sector, automobile spare parts and export oriented
businesses. These clients typically require a more detailed description on these boxes for
regulatory purposes. Compared to corrugated printing, costing in offset printing is opaque
and it is possible to achieve a higher margin on the sale of offset printed boxes.
The Business Opportunity
The purchase manager of the pharmaceutical company informed Ravindra that he would get
annual orders worth INR 5 million from his company. It was crucial for a pharmaceutical
company to have a trustworthy source to print on the boxes as piracy was a problem.
Ravindra believed that this was just the trigger to enable offset printing in-house. He
projected that in-house offset printing would gain him additional revenues (over and above
the pharmaceuticals contract) of INR 1 million and savings of INR 200,000 per year. The
additional costs would include new equipment worth INR 5 million, a month of working
capital to meet orders on short notice and extra space to store the increased inventory. As the
job required skilled workers, he would have to pay a monthly salary of INR 25,000 to the
operator and a rate of INR 200/day to the helper. The equipment would incur an annual
maintenance cost of INR 50,000 a year. All the other costs will increase proportionately on
the basis of sales.

Ravindra felt that he faced an excellent opportunity to enter the high margin business with
assured sales of approximately INR 6 million6. With a booming pharmaceutical and pesticide
industry in India, he felt that local players like him would be the key to meet the extra
demand arising out of these industries. However, he was unsure of how to finance the heavy
investment in equipment and working capital requirement. The offset printing business faced
rapid changes in terms of technology, hence obsolescence of machinery was a critical issue.
In addition, he needed to be assured of sustaining the number of orders should the
pharmaceutical contract not work out as positively as anticipated, something that would incur
sales expenses and perhaps the hiring of additional sales personnel. This made him slightly
uncomfortable as he was used to complete personal client acquisition thus far. Also, plunging
into an entirely new business line simply on the trigger of an order did not seem the most
strategic option. As he looked out of his window, he began to weigh the two options in front
of him and project the financial outcomes of both in his mind.

Mr. Ravindra Kedar, Promoter, S. K. Packaging estimated the value at the time.
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Exhibit 1 Growth Drivers In The Packaging Industry

Source: Paper, Film & Foil Converters Organisation, USA

Exhibit 2 Manufacturing Process At S. K. Packaging

Corrugation

Cung

Pasng

Scoring

Slong

Sching

Punching

Source: Case-writer & Mr. Ravindra Kedar, Promoter, S. K. Packaging

Exhibit 3 A Corrugating Machine At The S. K. Packaging Factory

Source: Case-writer

Exhibit 4 A Stitching Gun At The S. K. Packaging Factory

Source: Case-writer
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Exhibit 5 Balance Sheet As On 31 December, 2012

Assets
Equipment
Corrugation Machine
Cutting machine
Pasting machine
Rotary machine
Slotting machine
Stitching machine
Punching machine
Total equipment
Land
Building
Total assets
Liabilities
Equity
Long term loan (at interest rate of 10% for 10 years)
Total Liabilities

48,00,000.00

2,88,000.00
7,20,000.00
2,40,000.00

2,40,000.00

1,92,000.00

19,20,000.00
84,00,000.00

50,00,000.00

20,00,000.00

1,54,00,000.00

1,19,00,000.00

35,00,000.00

1,54,00,000.00

Machines have a life of 25 years and the current machines were bought 10 years ago.
Source: Case-writer & Mr. Ravindra Kedar, Promoter, S. K. Packaging

Exhibit 6 Income Statement For Year Ending 31 December, 2012

Revenue

5,40,00,000.00

Revenue From Finished Goods

Resale Revenue (10% Wastage, Sold At Rs. 10/Kg)
Total Revenue
Expenses

13,35,600.00

5,53,35,600.00

3,78,00,000.00

Raw Material

27,00,000.00

Other Raw Materials

1,44,000.00

Transportation Expense

13,50,000.00

Labour Expense

8,40,000.00

General & Administrative Expense

8,40,000.00

Depriciation Of Machinery

2,00,000.00

Depriciation Of Building

3,50,000.00

Interest Expenses

5,40,000.00

Selling Expenses
Total Expenses

4,47,64,000.00

PBT

1,05,71,600.00
70,82,972.00

PAT (Tax Rate = 33%)

Source: Case-writer & Mr. Ravindra Kedar, Promoter, S. K. Packaging

Exhibit 7 Costing Parameters

Monthly Sales

100.00

45.00
70% of sale price
5% of sale price

Average Sale Price

Average Paper Cost
Other RM Costs
Transportation Costs
Average Labour Expense
General & Administrative Expense
Depreciation Machinery
Depreciation Building
Current Interest Rates
Selling Expense

1,000.00
2.5% of sales

tonnes
per kg

per truck load

1.5% of sales, additionally 30,000.00 is needed for equipment

maintenance
Existing machinery has been considered for 25 years, it has been in
use for 10 years
After 10 years the building needs renovation
10% p.a.
Transportation of finished goods at 1% of sales

Source: Case-writer & Mr. Ravindra Kedar, Promoter, S. K. Packaging

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