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.
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.
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.
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.
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.
JK Paper Ltd.
JK Paper Limited is a pulp and paper company, engaged in the manufacture and sale of branded papers, fine papers, and packaging boards. The company provides various office documentation papers, including photocopy and multi-purpose papers for use in fax machines, photocopiers, and multi-functional devices, as well as desktop, inkjet, and laser printers; and premium watermarked and laid marked business stationery papers for corporate and individual customers.
The company has three integrated Pulp and Paper Mills viz; Unit JKPM at Rayagada (Odisha) and Unit CPM at Songadh (Gujarat) & Unit SPM at Kagaznagar, Telangana. With its recently concluded 170,000 TPA capacity expansion in Packaging Board at Unit CPM, the company’s present installed capacity is 761,000 TPA. Further, the company has a worldwide footprint with customers in more than 60 countries spanning the USA, Middle East, Europe, South-east Asia, and Africa.
In the recent quarter, on a consolidated basis, the company’s net revenue went up by 109.4% YoY to Rs 1508 crore. Volume in the same period increased by 81% to 190724 MT. Similarly, the PAT surged by 153.5% YoY to Rs 264 crore. Higher volume and sales realisation in Q1 FY23 over the corresponding quarter has contributed better quarterly performance, in spite of increased input cost.
On the valuation front, the company is currently trading at a TTM PE of 10x, as against the industry PE of 23x, which makes it one of the attractive paper companies. The company has delivered exceptional returns to its shareholders in the last two years.
Ruchira Papers Ltd.
Ruchira Papers Limited is engaged in the manufacturing of Kraft Paper and Writing & Printing Paper. The company’s white writing & printing paper is used in the fabrication of note books and writing material; the coloured paper is used in the fabrication of spiral notebooks, wedding cards, shade cards, children’s colouring books, coloured copier paper and bill books. Kraft Paper finds its application in the packaging Industry especially for making Corrugated Boxes / Cartons and for other packaging requirements.
In the last twelve months company’s insiders were buying shares, but not selling. Notably, the recent purchase by Daljeet Mandhan is the biggest insider purchase of Ruchira Papers shares that we’ve seen in the last year. What is worth noting that this large purchase was at significantly below the prevailing price of Rs 113.
The board of directors at its meeting held on 30th August 2022, has considered and approved the issue of bonus shares in the ratio of 1:10 i.e., 1(One) new fully-paid up equity share of Rs. 10/- each to be issued for every 10 equity shares held. The Board has fixed 10th day of October 2022 as record date.
Company has also posted better numbers recently. Net profit rose 157.30% to Rs 11.63 crore in the quarter ended June 2022 as against Rs 4.52 crore during the previous quarter ended June 2021. Sales rose 57.93% to Rs 198.79 crore in the quarter ended June 2022 as against Rs 125.87 crore during the previous quarter ended June 2021.
West Coast Paper Mills Ltd.
Incorporated in 1955, West Coast Paper Mills Ltd. (WCPL) is the flagship entity of the SK Bangur Group. WCPL manufactures writing and printing papers, among other products, from its 3.2-lakh metric tonne per annum (MTPA) paper manufacturing plant at Dandeli, Karnataka. The company is backward integrated with a 2.47-lakh MTPA, in-house pulp production capacity and 75-MW captive power plants. WCPM’s acquisition of Andhra Paper (APL) in October 2019 significantly improved the company’s scale and market position, making it the fifth-largest paper manufacturer, with a consolidated capacity of 568,000 metric tonnes per annum (mtpa). Company’s cable division entered into an agreement for supply of cables with large Indian Telcos, the management believes that a large network integrator for Tanfinet project and robust order book would help growth of their cable business.
For the April-June quarter (Q1FY23), the company posted over five-fold jump in consolidated net profit at Rs 208.95 crore from Rs 39.20 crore in the previous year quarter, on the back of strong operational performance. On a sequential basis, net profit of the company grew 49 per cent from Rs 140.51 crore. Beside the paper business, company has other division that too is doing well. Net Sales at Rs 1,114.15 crore in June 2022 up 107.24% from Rs. 537.60 crore in June 2021. EBITDA stands at Rs. 332.40 crore in June 2022 up 191.2% from Rs. 114.15 crore in June 2021. Share is still trading at attractive valuation of 8.5x. In the past six months, the stock price of WCPL has more-than-doubled.
Pudumjee Paper Products Ltd. 264
Pudumjee Paper Products has two business divisions, namely, ‘Paper Division’ and ‘Hygiene Division’. The Paper Division manufactures Specialty Papers and also exports. These products comply with special requirements of the customers for application in Packaging of Food products which require oil and grease resistance, papers for industrial application, household and personal hygiene application meeting requirements in daily life. The Hygiene Division of the company undertakes conversion of tissue products to value add a part of the production and its marketing together with dispensers and other hygiene products.
Company saw improved business profile supported by recovery in demand and increased realizations during FY22 and continuation of enhanced operating margin during FY22. Revenue improved to Rs 555.4 crore during FY22 as against revenue of Rs 436.9 crore during FY21 and this is backed by steady demand, which grew by 7% y-o-y and improved realization that grew by around 17% y-o-y. Operating margin has continued to remain comfortable at 12.7% during FY22, despite increase in raw material prices, driven by higher sales from better margin products such as print base, opaque laminating base, glassine tissue and other miscellaneous paper, and also by company’s focus on tailor-made products. Going ahead, the volumetric sales are expected to improve driven by steady demand for the products. Realization is expected to remain at comfortable level going ahead and this is expected to support the overall revenue growth over the medium term. Supported by comfortable margins, healthy accretion to reserves and limited reliance on external debt, makes it a good alternative to addition of your portfolio.
Seshasayee Paper & Boards Ltd.
Seshasayee Paper & Boards Ltd. (SPBL) has a track record of around six decades. Company was promoted in association with a foreign collaborator M/s Parsons and Whittemore, USA. After commencement of commercial production, having fulfilled their performance guarantee obligations, the foreign collaborators withdrew in 1969. The company is the flagship company of the Esvin group, which is engaged in other industries like sugar, chemicals, project consultancy among others. The company is supported by its in-house project consultancy company named SPB Projects and Consultants Limited, which is the project consultant for almost all major paper companies in India.
The company has a strong marketing set-up and a well-established distribution network to support the manufacturing activities. The company has a well-built network of over 70 active dealers. The company also exports its products to countries like USA, Sri Lanka, Nepal and Middle East countries.
The two manufacturing units of the company situated at Erode and Tirunelveli share significant synergies, wherein the company has an excess capacity of pulp manufacturing at its Erode facility, which is deployed at Tirunelveli unit, thereby reducing the latter’s dependency on imported pulp. The excess pulp production at the Erode unit caters to around two thirds of the pulp requirement of the Tirunelvelii plant. Moreover, the captive power plant of 36 MW at Erode unit is able to supply power to the extent of 3-4MW to the Tirunelveli unit and reduces its dependence on external sources. It is trading at a PE ratio of 11.72x, which is lower than the industry average.