Recommendation From Paper Sector

HERE IS WHY
Strong product mix and strategic location.
Robust financials with attractive valuations.
Market leadership.

India’s per capita consumption of paper and board stands at 11 kg, which is far below the world average of 57 kg in 2014. Therefore, there is huge potential in the paper industry, with growth rates expected at 7 per cent CAGR in coated, 5.7 per cent CAGR in uncoated and 9.1 per cent CAGR in packaging board by 2018-19. The potential gap between demand and supply in respective segments will persist considering that India imports paper and boards, giving further fuel to the growth of the industry. Considering positive micro environment, JK Paper stands to benefit the most from the overall scenario.

JK Paper’s CPM unit in Surat and JKPM unit at Odisha are strategically located. The company’s CPM unit is close to raw material sources, whereas the JKPM unit is close to large end customers and port. It has a strong distribution reach with its four regional offices, 14 warehouses, 206 distributors and over 4,000 dealers. JK Paper has a product mix with a total capacity of 4.55 lakh MT. The company enjoys market leadership in copier paper with a current market share of 27 per cent.

It is also among the top two in coated paper segment having current market share of 12 per cent. JK Paper’s packaging board segment has a current market share of 14 per cent. On the financial front, JK Paper’s revenue increased 9.22 per cent to Rs.1,292 crore in H1FY17 on yearly basis. 

The company’s EBITDA rose 22.47 per cent to Rs.247 crore in H1FY17 on a yearly basis. Its net profit also soared more than two-fold to Rs.70.62 crore in H1FY17 as compared to the same period in the previous fiscal. JK Paper’s capacity utilisation stood at 105 per cent in H1FY17 and its production stood at 239,123 MT and sales volume at 241,637 MT. JK Paper has performed financially and delivered good set of numbers over the last five financial years. 

The company’s topline increased by a CAGR of 13.09 per cent in FY12-FY16. Its EBITDA rose by a CAGR of 21.14 per cent in the last five financial years ending with FY16. JK Paper’s bottomline has increased by a CAGR of 8.69 per cent in FY12-FY16. On the segmental revenue front, JK Paper revenue comprised of 63.01 per cent from uncoated paper, 18.51 per cent from coated paper and 18.47 per cent virgin fibre board in H1FY17.

The company’s exports have increased more than three times to 48,553 MT in FY16 on a yearly basis. JK Paper’s ROE and ROCE stood at 9.08 per cent and 10.95 per cent, respectively, in FY16. Though the company’s debt-to-equity ratio is higher at 1.78x in Q2FY17, its interest coverage ratio is 1.55x which gives visibility for paying out of the liabilities in future. 

On the valuation front, JK paper’s share price is trading at a PE multiple of 19.63x as against its peers such as Seshasayee Paper (25.91x) and Emami Paper Mills (16.48x). The company’s PB multiple stood at 1.65x as against Seshasayee Paper (2.11x) and Emami Paper Mills (1.83x). It has given a dividend yield of 0.56 per cent to its shareholders.