JK Paper : Maintaining A Historic Leadership Position
JK PAPER
The company comprises integrated manufacturing facilities in three locations, helping moderate logistics cost, deliver products with speed and service a pan-Indian customer base
Etablished in 1962, JK Paper is a leading player in office papers, coated papers and packaging boards.It is one of the most respected paper companies today. JK Paper has a robust distribution network of over 300 trade partners and 4,000 dealers with 15 pan-India depots, reducing the turnaround time in servicing customers. The company’s diversified product portfolio comprises office paper, writing and printing paper to packaging board and specialty paper, among others. It sells these products through its range of brands i.e., JK Copier, JK Easy Copier, JK Sparke, JK Cedar, JK Max, JK Excel Bond, etc. It has an approximately 24 per cent leading market share in the branded copier segment.
During FY19 the company along with its subsidiary acquired Sirpur Paper Mills Ltd. under the Insolvency and Bankruptcy Code for a cash consideration of ₹ 782 crore. It owns a manufacturing facility in Kagaznagar, Telangana with a capacity of 1,36,000 TPA. JK Paper worked to revive the business of Sirpur Paper in FY20 and also invested additional ₹ 210 crore compared to earlier estimates to stabilise the operations. The company comprises integrated manufacturing facilities in three locations, helping moderate logistics cost, deliver products with speed and service a pan-Indian customer base.
It increased its capacity from 4,55,000 TPA to 5,91,000 TPA after its acquisition of Sirpur Paper Mills. Its plants are located at Rayagada (Odisha), Songadh (Gujarat) and Kagaznagar (Telangana). It has been able to leverage its available capacities and has achieved utilisation levels up to 111 per cent of installed capacity in FY20. The company leveraged its robust distribution network to service a pan-Indian customer presence and a global presence across 62 countries including the USA, major countries of Europe, the Middle East, Asia and Africa.
Sector Overview
The global paper and packaging board market was estimated to be growing at a CAGR of 1 per cent pre-pandemic. In terms of volume, the market stood at 419 million tonnes in 2019 with Asia contributing more than 40 per cent of the total demand. However, in 2020, the global paper and paperboard market is estimated to have contracted by 6 per cent, year on-year. India accounts for 4 per cent share of the global paper demand and globally, it is the fastest growing paper and packaging board market. The Indian paper and packaging board market was estimated to be growing at a CAGR of 6.2 per cent pre-pandemic.
In terms of volume, the market stood at 20 million tonnes in 2019-20. However, in 2020-21, the Indian paper and paperboard market is estimated to have contracted by 15 per cent year-on-year due to massive contraction in demand for printing and writing paper grades. People across the country are increasingly buying online groceries, food items and daily essentials while also purchasing merchandise online. These online trends tend to boost the demand for sustainable packaging solutions, as the e-commerce and retail industry qualifies to be one of the major adopters of paper and paperboard solutions in the country.
Key factors like favourable demographics, expanded disposable income levels, rising consumer awareness and demand for processed food have been underpinning the surge in demand of plastic packaging. Currently, India is one of the countries producing large quantity of plastic pharmaceutical packaging. The global pharmaceutical packaging market is expected to double to USD 149 billion in a decade. The online retail packaging market in India is expected to grow strongly with majority demand flowing in for flexible packaging, bubble wraps and corrugated boxes.
Financial Overview
Let’s turn to the financial performance of the company for Q3FY22. Considering the performance of the company recorded for the third quarter of FY22, on a consolidated basis, the company recorded net sales and other operating income of ₹ 1,023.62 crore which reported a growth of 37.42 per cent from ₹ 744.88 crore reported in Q3FY21. On the other hand, the operating profit was recorded at ₹ 284.11 crore in Q3FY22, posting a rise of 57.18 per cent as compared to an operating profit of ₹ 180.76 crore in Q3FY21. Q3FY22 recorded a net profit of ₹ 151.05 crore in comparison with net profit of ₹ 64.59 crore in the same quarter in the previous year, giving a significant rise beyond 130 per cent.
The operating profit margin and net profit margins have attractively improved from 24.27 per cent to 27.76 per cent and 8.67 per cent and 14.76 per cent, respectively, on a YoY basis. On the ratios front, the interest service coverage ratio (EBITDA for the quarter divided by interest expense for the quarter) has improved from 5.41 times to 9.65 times on a YoY basis, thus indicating a better ability to make interest payments. On a nine-month basis, the debt-to-equity ratio has shrunk from 1.30 to 1.18 whereas the current ratio has gone up from 1.32 to 1.38, indicating a positive status. Despite sharp increase in input costs in the recent period, an improvement in the company’s performance is due to recovery in the paper segment and growth in production and sales volume coupled with higher realisation.
The company maintains its leadership position in cut-size office paper and a strong presence in coated paper, packaging board and niche products. Also, Sirpur Paper Mills, a step-down subsidiary, exhibited strong performance. On the annual front, its net sales and operating income de-grew by 10.11 per cent from ₹ 3,060.19 crore in FY20 to ₹ 2,750.72 crore in FY21. The operating profit declined by 30.98 per cent in FY21 as compared to FY20 at ₹ 673.06, crore compared to ₹ 975.17 crore. Net profit declined by 49.46 per cent in FY21, recording ₹ 236.72 crore as compared to ₹ 468.41 crore in FY20.
The inclination of investors towards domestic paper companies has increased currently post hiking up of prices by manufacturers due to shortage of wastepaper amid an improvement in demand. Schools, colleges, offices, and courts have re-opened in the last one month which has led to shortage of paper.
The commercial production of the new packaging board plant at Unit CPM, Gujarat has commenced from January 14, 2022. This will increase the company’s total paper and board capacity to 7.61 lakh TPA on a consolidated basis and will enhance its market share in the fast growing packaging board segment. JK Paper also continued to focus on developing plantations which helps raw material security as well as creating jobs for farmers in the local community.
Outlook
The Indian paper industry stands to be the fastest growing paper market. India produces a wide variety of papers. The industry also enhances farmers’ income and bears high employability. It also bears the ability of recyclability of waste paper. The industry has an opportunity in terms of huge growth headroom from a per capita consumption perspective and literacy rate. Increase in consumption of packaging paper and board in the food and pharmaceutical sectors post the pandemic is another opportunity for the paper industry to advance. Innovative products also create more possibilities for this industry to grow. Another important chance the paper industry can leverage on is the ban on single use plastic which is likely to create an alternative paper market. Currently, shares of paper companies are seen rallying amid heavy volumes on expectation that re-opening of offices, educational institutions and courts will lead to regularisation of demand.
According to market capitalisation, JK Paper takes up 29.23 per cent of the entire paper and paper products industry. It has been the largest company in the industry for the last four years. A competitive advantage is enjoyed by the company. JK Paper contributes around 20 per cent of the industry’s sales and 42 per cent of the profits. The company’s share appears to be cheaper as it is trading with a lower price to earnings ratio (PE ratio) as compared to the peers and the industry PE ratio. In the last one year, the company has generated returns of 78.39 per cent in the equity markets. The stock has outperformed BSE 500 in the last three years, one year and three months. Hence, considering the positive long-term outlook for the paper industry as well as bundle of opportunities lined up for key players like JK Paper, we recommend BUY.