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Last Updated : Jun 29, 2019 12:02 PM IST | Source: Moneycontrol.com

Demand of import duty gives pricing power to paper industry; 3 stocks could give 20-23% return

The 'Going digital' slogan was expected to be major slowdown in the paper sector

Moneycontrol Contributor @moneycontrolcom
 
 
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Manali Bhatia

China being the major consumer of paper worldwide at 106 million tonnes, followed by the US at 71 million tonnes and India sharing the same scale of population as in China consumes a very little share which makes us understand the fact that India has a lower penetration rate and enjoys a greater scope of growth.

Talking particularly of the packaging sector, around 55 percent of the global consumption of paper is in wrapping and packaging. India is still behind in this particular segment. Plastic used to be the first choice of manufacturers for packaging.

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In the recent past, state governments have taken a series of measures to ban plastic and ensured strict compliance in plastic industry. This move has helped gain traction for paper packaging industry, though not fully scaled up yet, and would increase its demand in the coming years. Also, a robust demand in food industry, mono cartons in the pharma sector, and multiple orders online is expected to drive substantial demand for paper packaging.

Secondly, China has banned import of certain waste grade of paper owing to environmental concerns resulting in decrease of waste paper prices. India which imports around 40 percent of waste paper stands to benefit out of the same. As already India has scarcity of Pulp wood, the raw material used for manufacturing paper, and in the coming years owing to environmental concerns this scarcity is expected to shoot up further, giving pricing power to this industry. Attributes to this pricing power is also due to limited production (68.58 lakh tones) and increase in consumption (109.27 lakh tones).

Thirdly, there is a demand by major players to increase import duty on paper products, currently at 0 percent as per FTA. If it does, it would also provide benefit to this sector.

Also, the “Going digital” slogan was expected to be major slowdown in the paper sector. But, nevertheless, it should be known that paper packaging would be a boon for this industry.

JK Paper | Rating: Buy | CMP: Rs 122 | Target: Rs 150 | Return: 23 percent

The last quarter has been the best for FY19. A surge in price of paper has contributed to an upside in revenue. Moreover, most of the pulp is derived from plantations close to their manufacturing units attributing to reduction in material costs and expansion of margins.

The company is having two large integrated paper manufacturing units with combined capacity of 4,55,000 TPA and is already running at 100 percent capacity utilization. At the Sirpur plant, two machines will start producing from the second quarter and the other two machines will be ready for production by September-October 2019. Thereby, the full capacity will be used for production purposes by October.

This additional expansion will help grow by at least 20 percent in volume terms. Furthermore, an expansion plan is in line for new packaging board machine and pulp mill in Gujarat, awaiting environmental clearance where an additional new board machine of 1.7 lakh tone or two lakh ton would be added.

Also, it would be putting up a pulp mill of almost 1.5 lakh ton capacity in the next two years.

The company has a healthy financial profile; the net debt has been brought down significantly to Rs 700 crore in fiscal 2018-19 and the surplus cash being generated in going ahead will be used for repaying the debts.

Huhtamaki PPL | Rating: Buy | CMP: Rs 259 | Target: Rs 310 | Return: 20 percent

Being having strong legacy, a unique client base and relative inelasticity of FMCG sector (derives 80-90 percent of revenue) to economic cycles, coupled with global footprint of parentage, and deep market penetration; aids company to make profits in long run.

In 2018, it suffered from extra provisioning on account of income tax and interest. However, from Q4 CY 18, most issues have been settled down and delivered vigorous Q1 CY19 results. Forthcoming, it expects topline to grow at 10-12 percent and likely to see 60-80 Bps ramp up in operating margin in the next two years. But, the margin growth depends on upcoming monsoon, scenario of FMCG sector and volatility in crude oil prices.

Increasing capacity utilization to a maximum of 80-85 percent, improving demand for flexible packaging, and NASP initiatives would enable to improve its volume growth and boost revenues as well as profits ahead. In addition, the acquisition of PPIL and Ajanta Packaging (India) would help consolidating its position in pressure sensitive label business, and is likely to be EPS accretive as well, which could help to expand strong foothold and growth too.

International Paper APPM | Rating: Buy | CMP: Rs 428 | Target: 520 | Return: 21 percent

International Paper APPM being a MNC company is well placed to take advantage of the growth in paper industry. On numbers front, it reported pretty damn good results with EBITDA soared 61 percent during Q4 FY 19 driven by higher sales volume, record production levels, lower cost of raw material and improved operational efficiencies. Besides, sharp fall in interest charges added to the company’s profitability, registering 83 percent PAT growth in Q4.

In addition, Debt has been significantly dwindled from Rs 180 crores to Rs 12.54 crores in FY 19 and is expect to be brought down further moving forward. Despite its plant running at 95 percent capacity utilization, it has not yet announced any significant capacity expansion plans for subsequent years. Moreover, China’s ban on imports of low grade recovered paper are expected to keep global pulp prices elevated, resultant increase in global paper prices which has improved its realizations, thereby supporting its high margin ahead.

By investing in fibre-based markets, controlling costs, managing capital spending and focusing on deliberate improvement efforts to increase productivity and efficiency, expects company generating strong set of numbers, and free cash flow in years to come.

The Author is Senior Research Analyst at Rudra Shares and Stock Brokers

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on Jun 29, 2019 12:02 pm
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