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DSIJ Mindshare

Paper Stocks: Flying High On Robust Demand

Paper stocks have gained momentum, of late. Lohit Bharambe and Nikita Singh identify paper stocks that one can bet on at the current juncture. 

The Modi government’s perseverance towards Digital India has paved the way for growth for most of the industries, except the paper industry. The push towards a cashless economy followed by the GST roll-out has aggravated the pessimism in paper industry. However, considering traditional practices still followed in allied sectors and industries such education, print media, tissue papers and packaging, the paper industry still holds some scope for growth. Indian paper industry has created sustainable livelihood in rural areas and has helped generate employment for the local populace, especially for women, who earn their livelihood through this industry. The paper industry employs about 20 lakh people, including those employed directly and indirectly. According to Indian Paper Manufacturers Association (IPMA), the Indian paper industry accounts for about 3% of the world’s production, with the turnover of the industry estimated at Rs50,000 crore. 

The paper industry is fragmented into writing and printing paper (WPP), industrial paper (IP), newsprint (NP) and specialty paper (SP), out of which IP caters to 50% of total demand majorly for corrugated boxes. The WPP caters to 30% of the demand. The derived paper printing industry is termed to be the second most employable industry in India after China and has posted a growth of 15-17%, while commercial printing grew by about 4% in FY2017. 

India’s per capita consumption of paper and board, which stands a little over 13 kg, is way behind the global average of 57 kg. India’s consumption is lower than not only most of the developed countries but also considerably lower than many of the emerging countries.

The biggest threat to paper stocks is that the paper industry is majorly dominated by unorganized players, with a total of nearly 825 small and large mills. Moreover, paper companies are majorly seen importing their biggest raw material, wood pulp and waste paper, the reason being lower global prices compared to domestic industry and unavailability of degraded forest land for pulpwood. Wood plantation and pulp storage are the biggest bottlenecks India is facing today. The demand for paper in India is 15MT per annum, while the country produces only 12MT. The paper market in India, being the fastest growing paper market in the world, is expected to create demand growth of around 6-7% going forward. This is expected to widen the demand-supply mismatch further. 

The imports of paper, paperboard and newsprint into India have been steadily increasing. In the last five years, imports have risen at a CAGR of 11.4% in value terms (from Rs7,152 crore in 2010-11 to Rs12,284 crore in 2015-16), and 7.9% in volume terms (from 1.8 million tonnes in 2010-11 to 2.6 million tonnes in 2015-16), as per IPMA. 

However, paper mills are sitting on their idle capacity amid lower domestic demand. After the US imposed higher anti-dumping duty on paper and paperboard supply from Indonesia and China, these countries have shifted their focus to India. The domestic cost of production of finished paper is much higher, resulting in higher domestic prices. Due to this, paper and paperboard imports in India rose by 28% in FY17. Recently, higher demand and simultaneously rising wood pulp prices globally have resulted in increasing prices of paper worldwide.

Nevertheless, to curb this, many companies have started backward integration or put up captive plantation facilities in order to improve operational efficiencies and save costs. The cost of raw material has relatively declined as compared to the last year amid higher availability of catchment area. The paper companies have been seen shifting their plants from South to North due to better availability of water in the North, as against the water shortage in the South. 

Even, Indian Paper Manufacturer Association has proposed to the government to include paper mills in the ‘Make in India’ project so as to cut imports and promote domestic expansion. Moreover, complete digitisation would prove more hazardous as paper waste is easier to decompose than e-waste, and wood, which is the biggest raw material, can be multiplied by planting more or recycling. 

Considering financial performance of organized players in India, Pudumjee Paper Products Ltd, Emami Paper Mills Ltd, NR Agarwal Industries Ltd, South India Paper Mills Ltd and Tamil Nadu Newsprint & Papers Ltd can be considered as the top five companies to have posted exuberant CAGR in their total income and PAT over FY15-17. Pudumjee Paper Products, which got listed in March 2016, posted 96% PAT growth and has simultaneously witnessed its stock price surging nearly 97% since its listing. Further, NR Agarwal Industries, the maker of paper products, majorly duplex board and craft paper, witnessed PAT revival after net loss in FY15, driven by rise in prices of its products and concurrently lower cost of production amid reusable paper and mechanical de-inked paper pulp used as raw materials. The price movement, accordingly, surged 226% CAGR in two years. However, the largest domestic paper producer, Ballarpur Industries, suffered revenue de-growth and expansion in net losses amid financial crunch, while Tamil Nadu Newsprint withstood the water crunch in South India and managed tosustain its profits. Nevertheless, nearly 85% of the paper industry stocks have posted excellent performances in their prices over FY15-17. Thereby, despite Digital India campaign and competition due to cross-border dumping, the companies have been able to maintain their profits. The reasons for this success are many, including diversification, backward integration, export quality production, shifting of plants to areas where water availability is better, etc.

Tejas Khoday 
Co-Founder & CEO, FYERS

India is the fastest growing market in the global pulp and paper industry at 6-7% growth per year, whereas globally the growth has been much lower in comparison. In recent years, there has been a major shift of demand towards Asia due to the sharp divergence in growth prospects between India and the rest of the world. In spite of having over 16 per cent of the world's population, India produces only 3 per cent, and on a per capita basis, the consumption is less than one-fifth of the global average. The proliferation of e-commerce has contributed to the growth in the packaging boards segment at around 12-15 per cent. It is projected that by 2025, the industry will grow by 70 per cent. The profit margins are very low and it is a game of volume growth. Hence, companies with a focus on quality and cost control will come out ahead in the long run. Also, their fortunes are dependent on pulp prices, which have to be partly imported to the extent of 15-20 per cent. Although pulp prices have reduced, logistics and material handling are causes of concern. Besides that, it is important to note that there are no import tariffs or anti-dumping policies, and hence, there is a threat of dumping from China and Indonesia after the US imposed a countervailing duty in 2015. In such an environment, the companies which have a low debt-to-equity ratio and valuations are stable investment opportunities.
Sumeet Bagadia Associate Director, Choice Broking India is currently ranked 15th among paper producing countries in the world, with an estimated demand of 14.70 million tonnes, which is expected to rise to 25 million tonnes by 2024-25. Moreover, with India maintaining its status as one of the fastest growing economies as well as one of the fastest growing paper market, it is estimated that paper consumption could increase in excess of 50% to 20 million tonnes by 2020. We feel this growth will be driven by: n Economic development in India, which will result in increase in demand by key manufacturing sectors as their requirement for paper will increase, n Booming e-commerce market, which will increase demand for packaging materials such as cardboard, labels, cartons etc., n Government's push to increase literacy in India, via various initiatives. While we have a positive outlook towards the industry, one must keep a keen eye on the import front of the paper industry as over the past 5 years imports have grown at a CAGR of 8% in volume terms. Furthermore, import duties on paper and paperboard in ASEAN countries currently stands at Nil, thus resulting in import growth of 40% per annum. In addition to imports, the industry also faces threat from increased focus on digitisation and paperless transactions. However, given the government's increased impetus on education, along with increased demand from the packaging material industry, we expect the Indian paper industry to witness significant growth and remain one of the fastest growing paper industries in the world.

India is still a developing country and, as such, a major chunk of the population still prefers traditional way of living and, therefore, implementing Digital India campaign all over the country would take some more years. Moreover, the replacement of plastic products by paper products in a big way provides big room for paper products and gives more innovative ways out to sustain. jority of the stocks from the paper industry have managed to deliver robust returns in the past three years. The stocks, namely Kushal Tradelink, Star Paper Mills, NR Agarwal Industries, Ruchira Papers and Kuantum Papers, registered handsome gains in the past three years. One of the stocks that stands out in this sector is Kushal Tradelink which was quoting around Rs2.83 as on September 19, 2014 and as on September 19, 2017, its price stood at Rs121.35, which makes this stock the top gainer in this sector. On the other hand, there were few companies which delivered negative returns such as Ballarpur Industries and International Paper APPM. Overall, the stocks of paper industry have performed pretty well.

N R Agarwal Industries  CMP Rs.259 
BSE CODE 516082  Face Value Rs10   Market Cap F F (Cr.) 118.83

N R Agarwal Industries Limited (NRAI) is engaged in the business of paper manufacture and marketing for more than two decades. The company was among the first in India to manufacture paper products through the recycling route. The company is headquartered in Mumbai and conducts all its manufacturing operations in Vapi, Gujarat. 

It exports quality paper products to more than ten countries. The company addresses two categories: writing and printing paper and duplex boards. The total manufacturing capacity of the company is 3,06,000 TPA. 

On the financial front, NRAI posted a 14.27 per cent increase in its revenue to Rs288.93 crore in Q1FY18 from Rs252.84 crore in Q1FY17. Also, the company’s PBDT rose 29.48 per cent to Rs27.71 crore in the first quarter of FY18 on a yearly basis. The company’s net profit rose 77.02 per cent to Rs21.42 crore for the corresponding period.

On an annual basis, the company’s revenue rose 16.85 per cent to Rs1,040.54 crore in FY17 compared to the previous fiscal. The company’s PBDT rose 252.2 per cent to Rs97.01 crore in FY17 on yearly basis. The company’s profit after tax rose tremendously by 293.9 per cent from Rs17.83 crore in FY16 to Rs70.23 crore in FY17. 

The company’s PE stood at 5.92x, whereas its peers Emami Paper Mills and Kuantum Papers PE stood at 50.55x and 8.37x, respectively. We expect price of NRAI to go up. 

Seshasayee Paper and Boards
BSE CODE502450
Face Value Rs10
CMP Rs737
Market Cap F F (Cr.) 529.96 

Seshasayee Paper and Boards Limited (SPB) is a flagship company of Esvin Group. It operates an integrated pulp, paper and paper board mill at Pallipalayam, Erode in Tamil Nadu. The company’s product range includes printing and writing papers, packing and wrapping papers and specialty papers. The current installed capacity of the company stands at 1,15,000 tonnes per annum. SPB's exports are nearly 20 per cent of its production and is a significant exporter in the Indian paper industry 

On the financial front, SPB posted a 1.22 per cent increase in its revenue to Rs251.78 crore in Q1FY18 from Rs248.74 crore in Q1FY17. However, the company’s PBDT declined 2.85 per cent to Rs37.15 crore in the first quarter of FY18 on a yearly basis. The company’s net profit declined 9.8 per cent to Rs21.75 crore for the corresponding period. 

On an annual basis, the company’s revenue rose 15.74 per cent to Rs1,193.87 crore in FY17, as compared to the previous fiscal. The company’s PBDT rose by 153.2 per cent to Rs200.18 crore in FY17 on a yearly basis. The company’s net profit rose tremendously from Rs35.58 crore in FY16 to Rs128.85 crore in FY17. The company’s PE stood at 7.31x, whereas its peers Emami Paper Mills and Kuantum Papers PE stood at 50.55x and 8.37x, respectively. 

The company had good and consistent profit growth of 30.45 per cent over the last five years. Also, the company has considerably reduced its debt. We expect the stock price of SPB to soar. 

Rushil Decor
BSE CODE 533470
Face Value Rs10
CMP Rs957
Market Cap F F (Cr.) 624.99 

A flagship company of the Rushil Group, Rushil Decor Ltd (RDL) offers comprehensive engineered interior products including decorative laminated sheets and plain particle boards. RDL has an integrated multi-product modern facilities strategically located in Gujarat. 

Incorporated in 1993, RDL has an operating capacity of 48 lakh sheets a year in the laminate segment, accounting for about 3 per cent of the country’s total production capacity. Earlier this year, RDL came up with a proposal to set up a manufacturing unit for medium-density fibre (MDF) at Atchutapuram in Visakhaptnam with a capacity of 600 cubic metres per day at an outlay of Rs559 crore in a phased development. 

On the financial front, RDL posted 14.6 per cent increase in its revenue to Rs86.33 crore in Q1FY18 from Rs75.34 crore in Q1FY17. The company’s PBDT increased 33.76 per cent to Rs10.34 crore in the first quarter of FY18 on a yearly basis. The company’s net profit rose 38.61 per cent to Rs6.42 crore during the same period.

On an annual basis, the company’s revenue rose 11.85 per cent to Rs331.94 crore in FY17 as compared to the previous fiscal. The company’s PBDT rose 63.5 per cent to Rs40.21 crore in FY17 on a yearly basis. The company’s net profit rose tremendously from Rs7.15 crore in FY16 to Rs24.53 crore in FY17, registering 243.07 per cent increase. 

The company’s PE stood at 50.11x, whereas its peer Greenlam Industries' PE stood at 46.88x. The stock price of RDL has risen 83.35 per cent in the last one year. We expect price of RDL to soar further. 

Star Paper Mills
BSE CODE 516022
Face Value Rs10
CMP Rs179
Market Cap F F (Cr.)131.06 

Star Paper Mills Limited (SPM), established in 1938, is an integrated pulp and paper mill. The company is part of Duncan Goenka Group. The company produces a wide range of papers such as SS maplitho white/natural shade, greeting paper, kraft paper, padding paper, MG poster, Stiffner cover, cartridge paper, Azurelaid, and many more. These products have applications in paper printing, lottery printing, computer stationery, book printing, packaging various products, defence/ammunition packing and many more. The company has an in-house R&D unit recognised by the Ministry of Science & Technology, Govt. of India. The company mostly caters to demand in the domestic market. 

On the financial front, SPM posted 18.92 per cent increase in its revenue to Rs88.93 crore in Q1FY18 from Rs74.78 crore in Q1FY17. The company’s PBDT increased 16.27 per cent to Rs19.15 crore in the first quarter of FY18 on a yearly basis. The company’s net profit rose 5.96 per cent to Rs13.52 crore for the corresponding period.

On an annual basis, the company’s revenue rose 18.96 per cent to Rs324.12 crore in FY17 compared to the previous fiscal. The company’s PBDT rose 184.95 per cent to Rs71.21 crore in FY17 on a yearly basis. The company’s net profit rose tremendously from Rs16.5 crore in FY16 to Rs59.94 crore in FY17, registering 262.27 per cent increase. 

The company’s PE stood at 4.60x, whereas its peers Tamil Nadu Newsprint and Kuantum Papers PE stood at 23.18x and 8.37x, respectively. We expect price of SPM to rise.

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