Paper Industry: Sunset to Sunshine Industry! Check these handpicked 5 paper stocks

Once categorised as sunset industry is now appearing to be a sunrise industry. Thanks to new catalyst that is supporting the industry.
Paper Industry

The Covid-19 impacted different industries in different ways both in short term as well as for long term. There is an interesting observation. Its impact is diametrically opposite in short term and long term. One example is Paper industry. Covid-19 induced lockdown was devastating news for paper industry. Schools were shut down and moved online. Students didn’t need notebooks anymore. They could note down their teacher’s instructions on their computer. Newspapers were also closed as they could carry the virus and infect readers. Companies too cut their paper requirement as digitisation accelerated. Listed companies also stopped mailing hard copies of annual reports to shareholders. What all this means is that demand for all kinds of paper saw a share cut. Within few days, large parts of their business had vanished.

Post Covid Triggers

Nevertheless, what supported the industry during the tough times was e-commerce. Most of us were not allowed to step out of their house. In such cases we were ordering everything on e-commerce platforms. And that gave a massive fillip to packing board boxes. The pandemic, which led to a massive shift to online shopping, boosted demand for packing board boxes.

Now the paper industry is witnessing a paradigm shift from the demand perspective, with demand for newsprint, printing and writing papers dwindling, given the rising impact of digitisation. At the same time, the packaging paper segment is witnessing a rise, with growing demand for packaging from eCommerce, food and food products, FMCG and the pharmaceutical sector.

The paper industry can be broadly classified into Newsprint (NP), Printing & Writing (PWP) and Packaging paper (PP), with current capacity of packaging paper at around 45-47 per cent, vis-a-vis NP along with PWP at around 53-55 per cent for the industry on a consolidated basis. The domestic paper manufacturing industry is currently at a juncture where the newsprint papers and printing and writing papers segment is gradually losing out to the packaging paper segment. The installed capacity levels in packaging paper is seen picking up progressively, aided by the capex incurred in the recent past over FY2017 to FY2022, along with the capex planned over the next two fiscals till FY2024. The installed capacity in packaging paper division is expected to be largely at par with non-packaging paper capacity by FY2023 and notably surpass the installed capacity by FY2024.

Declining Import

According to the data from Directorate General of Commercial Intelligence and Statistics (DGCI&S) imports of paper and newsprint have been declining since 2017-18. The imports fell from 3,16,8000 tonnes in 2017-18 to 1,75,2000 tonnes in 2021-22.

Growing Export

On the other hand, the exports have almost tripled from 9,78,000 tonnes in 2017-18 to 2,85,7000 tonnes in 2021-22, according to the data from IPMA.

Projection

The year-on-year revenue growth for the paper industry plummeted in FY2021 owing to pandemic-induced disruptions in the form of factory lockdowns, curtailed demand due to closure of schools & colleges and offices working in hybrid modes. However, with the continued demand from FMCG, pharma and e-Commerce sectors, particularly for packaging paper, the sector is expected to grow in the range of around 30% in FY22, albeit on a lower base of FY2021. The growth is expected to be in the range of 7-8% in the next two fiscals supported by demand from the packaging segment.

One major near-term concern for the paper industry has been rising wood pulp and wastepaper prices and elevated fuel costs, given that the industry also relies on imported coal, wherein the prices have risen substantially over the last one year. Nevertheless, industry is managing these challenges by passing on such rises to the final customer as well as absorbing, wherever possible, on an aggregate basis, the long-term demand potential for the India paper industry remains intact, given the rising penetration of different forms on paper in daily livelihood and is tilting towards the packaging paper segment.

Other major catalysts were Russia-Ukraine war, and the recent single-use plastic ban has acted as tailwinds for the sector.

Bright Outlook

Now most of the paper stocks are shining as the majority of companies have hiked prices due to rising demand and shortage of waste paper. Companies like JK Paper, West Coast Paper, and Andhra Paper among others recorded strong growth in their stock price so far. The outlook for the paper sector is optimistic in India due to intrinsic use of paper in education in India. The market for writing and printing paper in India is expected to grow around 4 per cent per annum, higher than the global average. The demand for paper is also driven by increasing literacy levels, growth in print media (particularly in the vernacular languages), higher government spending on education sector, changing urban lifestyles as well as economic growth. The COVID induced demand for e-commerce is also likely to provide a boost for boards demand. Given, the unfavourable exchange rate, the demand for domestic paper is likely to be strong in the near term.

The sector is seeing a paradigm shift from demand perspective, with demand for NP and PWP dwindling given the rising impact of digitization, while the PP segment seeing a rise, with growing demand for packaging from e-commerce, food and food products, FMCG and pharmaceutical sector.

Secondly, paper falls under the FMCG sector, which is expected to grow at a CAGR of 20-22 percent in the next five years. The shares of major paper manufacturers have surged over 100 percent since the onset of the war in Ukraine. The Bull Run is likely to sustain through the next couple of quarters on the back of a robust demand triggered by the ban on the use of plastic, supply chain constraints, and lifting of Covid-19 restrictions. The price rise was mainly on the back of disturbance of the supply chain globally.

In the following pages we have handpicked five paper stocks that are likely to generated better returns going ahead. If you are reading on mobile app, please click here to read.

About the author: IE&M Team
IE&M Team
Indian Economy & Market is an Indian media and information platform producing data-backed news and analysis on all the vital elements at the intersection of the economy, stock markets, mutual fund, insurance, commodities, currency, technology, startups and business.

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