Analysis

India remains one of the fastest growing markets for paper globally and is expected to grow above 6 per cent per annum over the next few years. Paper consumption in the country is expected to witness a substantial jump in the future in sync with economic growth

JK Paper

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JK Paper is the market leader in branded copier paper segment and is one of the top two leaders in coated paper and high-end packaging boards. The company’s products are sold through extensive distribution network of 188 wholesalers, 10 depots and 4 regional marketing offices and covers nearly 4,000 dealers. The company has two large integrated paper manufacturing units known as JK Paper Mills in Rayagada, Odisha and Central Pulp Mills, in Songadh, Gujarat. The company’s product portfolio includes office papers, packaging boards, printing and writing papers and also specialty papers. The company is a leading exporter of branded copier papers from India with exports to 35 countries.

The company has recently made a substantial investment of approximately Rs.1775 crore in expanding and modernising the capacity at Rayagada. It involved state-of-the-art machines with 1,65,000 TPA of paper capacity and pulp mill with capacity of 2,15,000 TPA. This has significantly reduced water and energy usage. The company enjoys a pan-India presence and its brands enjoy a strong recall value due to efficient marketing. The company’s flagship brand JK Copier is one of the more popular copier brands in the country. The company completed the takeover of Sirpur Paper Mills in August 2018 after the National Company Law Tribunal (NCLT) approved the Rs.782 crore (including incremental capex towards modernisation) resolution plan.

Industry

The paper industry has witnessed a turnaround in fortunes since FY17. The domestic demand for paper remained strong on the back of the closure of stressed domestic capacities, which led to supply constraints. The industry received a further tailwind as raw material prices and power prices trended southwards. As these costs form almost 80 per cent of the operating cost, the profitability of paper companies have spiked.

India remains one of the fastest growing markets for paper globally and is expected to grow above 6 per cent per annum over the next few years. Paper consumption in the country is expected to witness a substantial jump in the future in sync with economic growth.

Domestic paper production is expected to rise to 39.7 million tonnes (MT) from 16.7 million tonnes (MT) in 2016-17 in line with the rising demand, according to Indian Paper Manufacturer Association (IPMA).

The industry has not added any significant capacities over the last few years following shortage of key raw material like pulp wood and rising prices of local waste paper. The printing and writing segment of the industry is expected to witness growth on account of rising level of literacy and universalisation of education. However, this growth could be slowed by the substitution of printing material by the electronic medium. The packaging paper and board segment, which includes containers, carton board and kraft paper, is expected to increase on the back of fast increasing e-commerce penetration in India.

The paper industry in India is a cyclical business. Raw material prices and demand-supply dynamics play a crucial role in the industry’s fortunes.

Growth Drivers

JK Paper remains well-positioned to reap the tailwinds of the paper industry as it enjoys a strong market presence in high-quality paper segments. The company also has an established brand name and has a high recall value. The company has a wide distribution network and has integrated production capacities. The company has managed to increase production volumes despite operating at full capacity, which indicates strong operational efficiencies. The favourable industry scenario like improved supply-demand dynamics and availability of raw material augur well for JK Paper.

The company is expected to continue making better realisations on account of high global pulp prices which resulted in an increase in paper prices. Given the supply-demand outlook, paper realisations are expected to sustain. JK Paper’s low dependence on imports, agro-forestry initiatives and usage of captive wood has resulted in JK Paper not being affected by the rising prices.

The softening hardwood prices, along with continued management efforts towards tree plantations, have led to the increased availability of wood near manufacturing plants, thereby lowering the average wood procurement costs for the mills. JK Paper has utilised the proceeds from better efficiencies and higher realisations to strengthen its balance sheet over the last few quarters. The organic and inorganic expansion is expected to lead to an increase in leverage over FY20 and FY21. The staggered nature of the capex and the positive industry fundamentals will mitigate the risk of high leverage to some degree.

JK Paper also acquired Sirpur Paper Mills for a consideration of Rs.782 crore in August 2018. Sirpur Paper Mills was shut down in 2014 due to operational inefficiencies and rising input costs. The management believes the acquisition will provide a synergistic advantage in terms of a strategically located manufacturing facility as well as access to raw material. This will more than double JK Paper’s uncoated printing and writing paper capacity and also supplement its product portfolio, including some specialty products. The company said it would allocate 400 crore towards restructuring of the closed unit and working capital over the next 2-3 years. The acquisition will help add a capacity of 138,300 TPA.

The company has also taken up an expansion project at its CPM unit in Gujarat to put up a packaging board capacity of 1.5 lakh TPA and pulp mill capacity of 1.4 lakh TPA with other utilities, which will cost a total of Rs.1450 crore. 



Challenges

The paper industry remains a cyclical industry. The demand-supply dynamics and raw material prices play an important role in determining the stage of the cycle.

The Indian paper industry has been growing at the rate of 6-7 per cent. There has been a sharp escalation in imports, which grew at a CAGR of 16-17 per cent over the last 7-8 years. The surge in imports was unprecedented from FTA countries, mostly ASEAN countries, where there was more than a six-fold increase due to zero import duties. The Indian paper market had become the preferred destination for the surplus material from the slowing markets. 

Rising imports and predatory pricing has been witnessed from surplus countries. To address this concern, the Directorate General of Anti-Dumping and Allied Duties (DGAD) had recommended imposition of anti-dumping duty, the difference between landed value and US$855 per tonne, on imports from uncoated paper from Indonesia, Thailand and Singapore. However, after concluding the anti-dumping probe, the Directorate General of Trade Remedies (DGTR) said there was no causal link between the dumped imports and injury to the domestic industry.

Financials

JK Paper net sales stood at Rs.869.49 crore in the quarter ended December 2018, up 9.95 per cent from Rs.790.81 crore in December 2017. The company reported a net profit of Rs.120.26 crore in December 2018, up 72.27 per cent from Rs.69.81 crore in December 2017. The company’s EBITDA stood at Rs.262.06 crore in December 2018, up 63.97 per cent from Rs.159.82 crore in December 2017.

On a QoQ basis, net sales stood at Rs.869.49 crore in the quarter ended December 2018, up 10.75 per cent from Rs.785.04 crore. The net profit for the company stood at Rs.120.26 crore in December 2018, up 9.75 per cent as against Rs.109.57 crore in the previous quarter. The company’s EPS stood at Rs.6.75 per share as against Rs.6.15 per share in the quarter ended September 2018.

Conclusion

JK Paper remains well-positioned to reap the tailwinds of the paper industry as it enjoys a strong market presence in high-quality paper segments. The company also has an established brand name having a high recall value. The company has country-wide distribution network and has integrated production capacities.

The acquisition of Sirpur Paper and the synergies from the same will be important for JK Paper due to the strategically located manufacturing facilities and access to key raw material. The acquisition will more than double JK Paper’s uncoated printing and writing paper capacity and also supplement its product portfolio including some specialty products. By virtue of the above factors, we recommend a HOLD.

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