ICRA maintains valuation grade 'C' to JK Paper

ICRA Equity Research Service has come out with its report on JK Paper Limited (JKPL). The research firm has maintained valuation grade 'C' and fundamental grade of 4/5 to the company.

JKPL reported an Operating Income (OI) of Rs. 357.4 crore, which was up by ~13% on YoY basis and the has been largely driven by increase in sales volume as the average sales realisation remained almost flat for the quarter. For the 12 month period ending March 2012, the OI stood at Rs. 1330.5 crore up by 8% on YoY basis, which was partially driven by increase in sales volume as well as sales realisations. The sales volume growth during FY12 was around 4% which was partially supported by 77% increase in traded goods sales and partially through a 3% increase in in-house production volume. The growth in in-house production continues to remain modest in the backdrop of capacity constraints.

Sales realisations remained flat despite increased in input costs:
Despite an almost 20% hike in input costs during FY12, JKPL’s sales realisation was up by only 4% during this period; thereby indicating pressures on its ability to pass on the hike in input costs. The sales realisation during Q4FY12 remained stagnant and marginal improvement in profitability was driven by reduction in energy costs. For the Q4 ended March 2012, the average sales realisation stood at Rs 47,603/MT as against a realiation of Rs 47,848/MT for FY12. 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.

Cost pressures continue to exert pressures on profitability margins:
While JKPL’s revenues were inline with our estimates, however as stated above, as a result of stagnant sales realistion and mounting cost pressures, the EBDITA margins remained under pressure during Q4-FY12 and overall for FY 12 also. The EBDITA margin/ton of sales stood at Rs 4,649/MT for Q4-FY 12 and Rs 5,729/MT for FY12 which is one of the lowest during past few years. The key reason for the decline is the sharp increase in raw material prices (wood, pulp) and power & fuel cost as a result of which Cost of Goods Sold (COGS) was up by almost 21% as against a marginal increase of 8% in sales on YoY basis. As a result, the EBDITA margins declined substantially to 12% for FY12 as against 21.3% in previous year.

Ability to increase paper prices improves with Rupee depreciation;
however it will be offset by increase in imported pulp and energy costs:
The currecncy depreciatin will improve the export prospects for the domestic paper industry and at the same time increase the landed price of imported paper. This is expected to ease out the supply pressures currently being faced by domestic industry. JKPL’s coated paper and board has direct competition from imports which will also ease out partially. However at the same, the currency depreciation will adversly impact the price of the imported pulp used by the company for its board plant and depending on the domestic coal availability, the energy costs can also get impacted adversely.

Valuation: In assessing a company's valuation, various parameters are looked at including the company's earnings and growth prospects; its ability to generate free cash flows and its capacity to generate returns from the capital invested. The valuation is also benchmarked against an appropriate peer set or index. While assessing a company's relative valuation, the historical price volatility exhibited by the stock, besides its liquidity, is also taken into account. The extent of overvaluation or undervaluation is adjusted for the relative volatility displayed by the stock.

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