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J K Paper - Capex to drive growth

By Kaustubh Ghotikar | 6/20/2011 5:01 PM Monday

At times it makes sense to focus on scrips ignored by the market and available at beaten down valuations. We have therefore chosen the paper sector and short-listed J K Paper Limited (JKPL). Apart from its low valuation of a PE of 3.5x and EV/EBIDTA of 3x its FY11 profits, factors such as its market leadership, huge capex, buoyant demand and high dividend yield of 4.7% along with the sector being poised for re-rating makes us recommend JKPL at CMP of Rs 47.8

JKPL is a manufacturer of branded paper and has presence in three segments viz. copier paper, coated paper and packaging board paper. For this company with a turnover of Rs 1,233 cr, the copier segment accounts for almost 47% of the revenue while 30% and 20% are derived from the packaging board and coated paper segment respectively. The balance 3% comes from others.

There are reasons why JKPL should do well. First, it has a presence in high-growth segments which are growing briskly at a double-digit pace. Secondly, it’s a market leader in all the segments it operates in with good brand recall. While it’s a leader in the copier segment with a market share of 25%, it is the second-largest in coated paper and virgin packaging board with market shares of 13% and 27% respectively. Further, the demand for paper has been strong not only due to the service sector but also for the rising literacy rate and the government’s thrust on education. In fact prices too have increased over last six months and while companies such as JKPL would continue passing on the increased cost to customers, we expect price hikes in FY12 as well, which would keep the realisations healthy. Even our dealer checks have confirmed that price hikes may be in the offing.

JKPL is also expanding its paper and pulp capacity to 2,75,000 TPA from 1,25,000 TPA at its Orissa plant at a cost of Rs 1,653 cr, to be funded through equity (FCCB of Rs 225 cr already raised and Rs 250 cr through a right issue expected in July 2011), Rs 1,028 cr through sanctioned debt and the balance Rs 150 cr through internal accruals. This capacity will come on stream in FY13. JKPL has also increased its packaging capacity to 84,000 TPA from 60,000 TPA through de-bottlenecking, the benefits of which would be seen in FY12.

For FY11 JK Paper’s revenues increased by 11% to Rs 1,233 cr (Rs 1,106 cr) while profits increased by 17% to Rs 106.42 cr (Rs 91 cr). At these numbers JK Paper is available at a PE of 3.5x and EV/EBIDTA of 3x respectively, which is at a discount to its peers such as BILT, TNPL, etc. In fact the recent acquisition of Andhra Pradesh Paper by International Papers has opened up an investor debate on the paper industry’s valuations. Hence we expect the sector to be re-rated soon, which will improve the valuations’ outlook further besides opening the sector for acquisitions and consolidation. Hence one can buy JKPL with a one-year target of Rs 58, though the price may remain subdued in short term due to the proposed right issue.

 

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