Why Paper Stocks Have Defied The Market Rout
Shares of paper makers surged this year on higher demand and prices, defying the rout in the small- and mid-cap benchmarks.
JK Paper Ltd., Seshasayee Paper & Boards Ltd., West Coast Paper Mills Ltd. and International Paper APPM Ltd. have gained 38 percent to 72 percent in the past one year as of Nov. 23. By contrast, the BSE small- and mid-cap gauges have tumbled 11 percent and 19 percent, respectively during the period.
Investor optimism about paper stocks comes even as global pulp prices have been rising. That’s because Indian companies that don’t largely rely on imported hardwood pulp are expected to see their margins improve. Also, China’s restrictions on import of low-grade recycled paper is expected to increase demand for wood pulp-based paper made in India.
The overall paper demand is likely to grow at an annualised rate of 6.6 percent to 18.5 million tonnes in 2018-19, marginally improving from 6.4 percent pace of increase till March 2016, according to report by CARE Ratings.
- CARE expects printing and writing segment demand to grow at a 4.2 percent annualised rate to 5.3 million tonnes in FY19.
- Demand for packaging paper and board is expected to increase at 8.9 percent to 9.7 million tonnes by then.
Analysts Bullish On JK Paper
Analysts are bullish on JK Paper, the largest paper maker by market value in the little-tracked sector—only JK Paper is tracked by at least five analysts among peers. The consensus 12-month target for the stock is Rs 250, implying a return potential of 50 percent.
The optimism stems from better margins and higher capacity. JK Paper’s profit nearly doubled to Rs 110 crore in the quarter ended September, according to its exchange filing.
- Revenue rose 17 percent to Rs 785 crore.
- Operating income or earnings before interest, tax, depreciation and amortisation rose 48 percent to Rs 205 crore.
- Operating margin expanded 550 basis points to 26.1 percent.
That came on the back of a 26 percent revenue growth in the previous quarter. While the profit after tax rose 58.3 percent during the quarter, earnings before interest, tax, depreciation and amortisation grew 30.3 percent.
The company recently increased its paper capacity from 436 kilotonnes a year to 471 ktpa by removing bottlenecks. That could help boost volumes and improved realisations, according to Edelweiss.
JK Paper being the market leader in coated and non-coated papers is expected to do well with decent demand for copier paper and packaging, according to Parthiv Shah, director at Tracom Stockbrokers. The company’s plant is strategically close to ram material availability, he said, adding that JK Paper has been reducing debt and the turnaround subsidiary Sirpur Paper Mills Ltd. would also help.
A likely pick up of demand from the education sector in quarter ending December is also expected to help JK Paper, according to Shah.
Edelweiss Investment Research said JK Paper’s return on capital employed is likely to improve from 12 percent to 15.5 percent in three years through March 2020. Sharp improvement in balance sheet would provide opportunity expansion and acquisition in the near future, it said. The company’s net-debt-to-equity ratio is expected to fall to 0.22 from 1.08 in March 2017. The net debt-to-equity ratio for the financial year ended March 2018 stood at 0.43.
Veteran investor KR Choksey has identified JK Paper has one of his picks. “Positive management commentary for the second half of financial year 2018-19, efficient and cost-effective raw material sourcing along with benefits from Sirpur Paper lead us to believe in the potential of the stock.”
Valuations too have turned favourable for JK Paper. It trades at 7.14 times its estimated earnings for FY20 compared with 10x three months ago.
West Coast Paper is also optimistic about growth. Higher demand aided its volumes and the company expects the trend to continue, according to Sharekhan. That allowed the company to increase prices as it took advantage of a deprecating currency, it said.