Moneycontrol Research
We continue to remain upbeat on the prospects of paper sector and expect paper companies to hold onto their healthy operating margins. Within the sector, JK Paper is our top pick. The company is well-positioned due to its strong market position with a presence in high quality paper segments, cost leadership and integrated production capacities.
With an installed annual capacity of 455,000 tonne per annum (tpa) of paper and paper boards, JK Paper continues to reap benefits of positive industry dynamics such as demand-supply scenario. Earnings growth momentum continued for the company as witnessed in its last reported Q2 earnings. Its net profit in Q2 almost doubled year-on-year (YoY) to Rs 110 crore driven by strong revenue growth and margin expansion.
JK Paper’s margin improved further to 26.1 percent in Q2 FY19 (FY18: 21 percent, FY17: 19.5 percent, FY16: 16.5 percent) on the back of improving realisations, reducing raw material costs and improving operating efficiencies.
As an integrated player, JK Paper clearly is best positioned as it sources bulk of its wood requirements from captive farm forestry. Due to lower dependence on imports, the company has not been adversely affected by global pulp prices that have been on a rising trajectory in the past five years. In fact, rising pulp prices have increased paper prices improving realisations for JK Paper. Additionally, adequate water is available at both of its units — Gujarat and Odisha -- and has also achieved self-sufficiency in power with its 80 MW capacity.
In addition to input prices, margin improvement is on account of better operating efficiency and is a durable source of advantage.
We expect EBITDA margin to remain robust, with both realisation and cost scenarios likely to remain favourable in the near term.
Since operating at more than full capacity, JK Paper has lined up capacity expansion to achieve meaningful volume growth. It announced brownfield investment of Rs 1,450 crore for setting up additional capacity up to 200,000 tpa of packaging board (including pulping facility of up to 160,000 tpa).
Though commercialisation of new capacity addition is likely to take more than 24 months, acquisition of Sirpur Paper Mills will result in meaningful increase in production in the near term. Part of Sirpur Paper’s total capacity of around 1,38,000 tpa is expected to come on stream in H1 FY20 on completion of refurbishment of the existing plant. This will give JK paper relative advantage vis-a-vis its peers.
Thanks to improved financials and strong earnings growth, JK Paper’s stock has outperformed broader indices. While some part of the valuation re-rating seems to have played out, more can follow from the planned capacity expansions and acquisition of Sirpur Paper.
Recently, the stock corrected by around 20 percent from its 52-week high following the overall market weakness. JK Paper is currently trading at 4.6 times FY20 estimated EV/EBITDA, which is reasonable considering its high earnings growth potential. With potential upside triggers arising from ramping up of additional capacity acquired (Sirpur Paper) along with strong earnings visibility, JK Paper is a stock worth buying at current levels.
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