Paper industry Riding The Consumption, e-Commerce and Education Boom Paper industry

Sagar Bhosale

Paper stocks have surprised investors in the past one month or so. Amir Shaikh finds out what is brewing in the paper industry and whether paper stocks present an investment opportunity.

India is the fastest growing major paper market in the world. During 2011 to 2016, the Indian paper industry witnessed a CAGR of almost 8 per cent, as against the growth of one per cent for the global paper industry. India's paper industry contributes about 3 per cent of the world's production of pa per. The paper industry is divided into four different segments, viz. printing & writing (P&W), packaging paper & board, specialty papers & others, and newsprint. 

The demand triggers for paper products are increasing disposable incomes, rising per capita expenditure, uptick in the education sector, requirement of better quality packaging of FMCG products marketed through organised retail, and increasing preference for ready-to-eat foods. The paper manufacture uses a variety of raw materials such as wood, bamboo, recycled fibre, bagasse, wheat straw, rice husk, etc. Pulp is major raw material use by paper manufacturer, which forms over 40 per cent of the total raw material cost and is sourced from wood, wastepaper, agriculture residues, etc. According to Indian Paper Mills Association (IPMA) estimates, the industry provides employment to over 5 lakh people across approximately 750 paper mills. 

Paper industry is capital intensive due to the high cost of investment in land and machinery for paper mills, repairs and maintenance of mills, cost of upgrading technology, cost of environmental compliance, growing wood plantations and establishing a distribution network. All these factors make paper manufacturing a highly capital-intensive industry. In addition to these factors, another factor that creates woes for the new entrants is the cyclical nature of the paper industry. Owing to all these factors, small players might not be able to keep up with heavy investments that are required to remain competitive. Besides, the paper industry in India is highly fragmented and the top 5 players account for 12 per cent of the market, whereas in other markets such as USA, China and Indonesia, the top three players account for market share of 68 per cent, 21 per cent and 72 per cent, respectively. Also, the introduction of GST would lead to surge in costs for the unorganised and tax-evading players. Earlier, the unorganised players used to have an edge over the organised players due to the tax evasion, which will be longer available under the GST era. This provides huge opportunity for organised and incumbent big players to gain market share from the unorganised and smaller players. 

The demand for packaging paper and board segment is expected to grow at a CAGR of 8.9 per cent and reach 11.4 million tonnes in FY20. The demand is expected to grow from industries like FMCG, food and beverage, pharmaceutical, and textiles among others. There is a growing trend of paper consumption owing to increased urbanisation, requirement of better quality packaging for FMCG products marketed through organised retail and increasing preference for ready-to-eat foods. The printing and writing segment demand is expected to grow at a CAGR of 4.2 per cent and reach 5.7 million tonnes in FY20 on account of expected uptick in the education sector with improving literacy rates and growing enrolment as well as increasing number of schools and colleges. Furthermore, the pick-up in education sector is expected to lead to an increased expenditure on textbooks, notebooks and other assorted paper products, thereby driving the demand. Additionally, with higher literacy levels, circulation of other print media such as newspapers, magazines, etc. would also have a positive impact. Besides, the rapid growth of e-commerce is expected to provide India's packaging board segment huge opportunities to grow rapidly in the coming years. 

Notably, recent plastic ban by the Maharashtra government would be yet another catalyst for paper industry as industries which use plastic will move to alternatives. There are almost 20 states that have completely banned use of plastic, which provides the demand trigger for alternatives such as paper. 

The per capita consumption of paper in India stands at about 13 kg, which is far below compared to other developed and developing nations and the global average of 57 kg and the Asian average of 40 kg. With strong Q1FY19 results, most of the paper stocks have run up sharply in recent times. Also, the recent plastic ban in the state of Maharashtra helped in improving sentiments for the paper stocks. The charts below depict the returns of top five paper stocks for various time frames. 

Risks for the paper industry 

India is a wood fibre deficient country, which results in inadequate raw material availability domestically. This is a major limitation for the paper industry. The current demand for pulpable wood by paper industry is around 11 million tonnes per annum, but the domestic availability is around 9 million tonnes per annum. The demand is expected to increase to 15 million tonnes per annum by 2024-25. The increasing digital trend may also adversely impact the paper industry. Further, the government intervention in this industry is high. 

Conclusion: 

Going forward, paper consumption is expected to grow over 50 per cent to 20 million tonnes by 2020 and to 23.5 million tonnes by 2024-25. Looking from demand perspective, the country's current per capita consumption of 13 kg is far lower than other developed and developing nations. Every one kg incremental per capita consumption results in additional demand of more than one million tonnes a year. This provides huge potential for paper industry to grow steadily in the years to come. During 2017-18, capacities of almost 3 lakh tonnes per annum were shut down in China due to lack of environmental compliance. Indian manufacturers using waste paper stand to benefit because of lower global waste paper prices due to excess availability. 

When the markets are witnessing deterioration in paper consumption amid extensive use of digital platform, the other growing industry such as e-commerce is likely act as cushion for paper industry as it is likely to fuel growth of packaging paper and board segment. Additionally, the increasing consumerism and literacy will also provide support to the paper industry.

The expansion of packaging industry in India would also support the paper industry to grow further in years to come. Notably, weakening of the rupee against the US dollar is likely to make imports costlier and, thereby, turn the demand towards local players. Also, the weakening of rupee would also help exporters to boost their export share as rupee remains at elevated level. Owing to all these factors, India is expected to continue its fastest growing paper market tag in years to come.

JK PAPER (BUY) 

CMP Rs 170.15
BSE Code 532162
Face Value Rs 10
Bse Volume 137,964 


HERE IS WHY Largest producer of branded papers No dependence on hardwood pulp for its P&W segment Expanded capacity to aid in gaining market share

JK Paper operates mainly in the paper manufacturing business and is India's largest producer of branded papers and a leading player in the printing and writing segment. The company operates two manufacturing facilities, which are located at Rayagada, Orissa and Songadh, Gujarat. In these two plants, the company has installed capacity of 276,000 TPA of pulp, 381,000 TPA of P&W paper, 90,000 TPA of paperboard and 77 MW of power. 

Furthermore, in the ongoing fiscal, the company has acquired Sirpur Paper Mill, which is operating P&W paper facility of 138,300 TPA in Telengana. JK Paper's product portfolio has spread across high-quality paper segments, such as coated paper, uncoated paper and packaging board. Additionally, it leads in the copier paper segment, it is the second largest in coated paper and the fifth largest in packaging board.

In terms of financials, JK Paper's net sales for the first quarter of FY19 was Rs.795 crore, representing almost 26 per cent YoY surge over the corresponding quarter of last fiscal. This robust sales growth was led by stellar volume growth of 21 per cent. Its EBITDA for the quarter increased almost 30 per cent from the corresponding quarter of the last fiscal to Rs.199 crore, with corresponding margin expansion of 87 bps. 

The EBITDA margin for Q1FY19 stood at 25.1 per cent. The company's net profit for Q1FY19 spiked almost 58.3 per cent to Rs.95 crore over the corresponding quarter of last year. The net profit margin for the quarter surged almost 245 bps YoY to reach the level of 11.9 per cent. Remarkably, JK Paper has reduced its net debt from Rs.1041 crore as on FY18 to Rs.850 crore as on June 30, 2018.

Looking at the full years performance, the revenue for FY18 rose almost 8.2 per cent to reach Rs.2844 crore. Its EBITDA for the fiscal rose 20 per cent YoY to Rs.613 crore with corresponding margin expansion of 210 bps. The EBITDA margin for the full year was 21.6 per cent. The net profit during the fiscal 2018 surged almost 67 per cent over the previous year to Rs.260 crore. Notably, JK Paper's net profit margin for the full year rose to 9.1 per cent from 5.9 per cent in the preceding fiscal.

In terms of valuations, despite the recent run-up in its stock price, JK Paper is still available at reasonable valuation of 11.32x P/E on TTM EPS, as against the industry P/E of 13.4x. The company also has good return ratios of 17.4 per cent (RoCE) and 17.5 per cent (RoE). 

Unlike the other paper manufacturers, JK Paper has almost no dependence on hardwood pulp for its P&W segment, which would benefit it from the strong domestic industry fundamentals and a sharp increase in global pulp prices. The sharp reduction in dependence on imported hardwood for its paper manufacturing operations bodes well for JK Paper amid weakening rupee against the US dollar. 

Further, in the scenario of limited capex plans of strong domestic paper producers and stressed balance sheet positions of other major paper producers, JK Paper is well-poised to gain additional market share by organic growth (paperboard expansion) or inorganic growth (SPM acquisition) in the near term. The company has already expanded its capacity by de-bottlenecking and by acquiring Sirpur Paper Mill.Considering all these factors, we recommend our reader-investors to BUY JK Paper.

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