ICRA assigns valuation grade of 'C' to JK Paper

ICRA Equity Research Service has come out with its report on JK Paper Limited (JKPL). The research firm has assigned a valuation grade of "C" to the company on a grading scale of 'A' to 'E', in its research report dated August 07, 2012.

JK Paper Limited (JKPL) reported an Operating Income (OI) of Rs. 345.2 crore, which was up by ~6.5% on YoY basis. The revenue growth was driven by 4% increase in sales volume and 2.5% increase in average sales realisation.While the sales realisation have improved by 2~5% in copier and board segment, increasing imports in coated paper segment, hurt the overall increase in sales realisation. The revenue growth in the coming quarters of FY13 is expected to remain rangebound given the capacity constraints at JKPL, however the same is expected to increased in FY14 post the completion of ongoing expansin.

Margin expansion driven by decline in input costs and marginal improvement in sales realisations: During Q1FY13, the input costs witnessed a moderation which was mainly driven by relatively lower cost of wood/pulp consumed. With decline in cost of production and marginal increase in sales realisation, the contribution margins witnessesd a marginal improvement from Rs 4600/MT in Q4-FY12 to Rs 6100/MT in Q1-FY13; The EBDITA marings also improved from 9.7% to 12.4% over the corresponding period.

Costs still continue to remain high on YoY basis in relation to selling prices, profitability margins expected to remain under pressure in near term: Despite an improvement in profitability marings in Q1-FY13, the profitability pressures continue to remain reflected in EBDITA/Ton of around Rs 6100/ton during Q1-FY13, which is considerably lower than its historical averages of over Rs 10,000/MT of production. The procution costs have increased by 15% on YoY basis, whereas the average increase in realisation is at much lower level of ~6%. Similar to JKPL, other industry players have also been witnessing the pricing pressures owing to recent capacity additions undertaken by the large industry players, as a result of which their ability to pass on the hike continued to remain limited.

No major planned capacities additions in medium term to absorb excess supply in medium term: As per our estimates, apart from scheduled capacity addition of JKPL in Q4-FY13, no major capacitiy additions have been announced in the industry especially in Printing and Writing Paper. Hence we expect the pricing pressures to ease out in medium term as the excess capacity due to bunching of additions in FY10 and FY11 starts getting absorbed.

Capacity expansion on track: The ongoing capacity expansion of JKPL, whereby its prodcutin capacity will stand increased by almost 1.65 lakh ton p.a. is expected to be completed by end of FY13, which is expected to ease out the capacity constraints at JKPL and result in sharp revenue growth during FY14 and FY15.

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