Paper stocks may be looking good but analysts see the recent rise as momentary.
The recent sharp rally in paper stocks following the government's pledge to eliminate single-use plastic has made investors sit up and take note.
Many are of the opinion that the government’s shun-plastic push has brightened the prospects of paper companies. But, analysts and industry watchers are less convinced with this rally.
The government has pledged to eliminate single-use plastic by 2022. As per reports, a nationwide ban on single-use plastic, including bags, cups and straws, could come as early as on October 2, the 150th birth anniversary of Mahatma Gandhi.
Since August 15, when Prime Minister Narendra Modi urged citizens to give up single-use plastic by October 2, 20 paper stocks have surged over 10 percent as of September 11 on BSE.
At first glance, it appears that the paper stocks are in a sweet spot. Analysts, however, see the recent rise as a momentary fillip.
"This is news-based momentum rally as fundamentally, these are high-debt firms, with major working capital and raw material issues," said Sameer Kalra, founder, Target Investing.
Only a few who have captive raw material source would benefit in the medium to long term, he said.
G Chokkalingam, founder of Equinomics Research & Advisory, seconds the view.
"The rally in paper stocks may fizzle out soon. The ban on plastic will come into effect gradually and also there are other alternatives to plastic as well such as jute and cloth bags," he said.
Chokkalingam also highlighted that the paper industry had a plethora of unorganised players, who would give serious competition to bigger players for market share.
Viewing paper bags as the only substitute to plastic bags is not logical, experts say. "The future for paper is in value-added bags; what you supply to Flipkart and Amazon for specialised packaging," Chokkalingam said.
On valuation front, paper stocks look fair which can catch investor interest."Paper stocks are trading at a fair valuation. Being from the commodity industry, they mostly trade at a single-digit premium and some stocks have given 5 to 10 percent returns in the last three-four years. This is a cautious play," said Chokkalingam.The Great Diwali Discount!
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