Have spare cash? Invest in paper

If you study the numbers of the past six months, Indian paper companies have reported double-digit earnings growth over the past two years; and their stocks have been bullish. Profits at these paper manufacturers had surpassed the 2016-17 numbers in the first nine months of 2017-18, with improved efficiency, a favourable pricing environment and reduction in interest expense.

However, it is only in the past few months that the stock valuations, which was in single digits have been boosted. One reason is, is the sustained bull run in the market, the others insiders says is in the wake of rising paper prices due to shutdown of capacities in China.

The PrintWeek India and WhatPackaging? team scoured the market and understood there are three reasons which analysts cite. These are: The ban on low-grade mixed waste paper in China, the use of waste paper by Indian manufacturers who stand to benefit on account of lower global prices on excess supply and higher realisation for recycled paper, and finally, companies like West Coast, TNPL and NR Agarwal who are benefitting due to the significant board production in their factories.

JK Paper is planning a Rs 650-crore investment. This shall entail modernisation and the balancing of the plant as well as shifting of the old pulp mill at JK PM plant Odisha Plant to Gujarat plant

In spite of an expanding digital economy, JK Paper, West Coast Paper and International Paper are set to script their most profitable performance in this financial year.

Profits at these paper manufacturers had surpassed the 2016-17 numbers in the first nine months of 2017-18, with improved efficiency, a favourable pricing environment and reduction in interest expense.

JK Paper has reported a net profit of Rs 1.9 billion during the April-December period of FY18, growing 75 per cent over a year before. The FY17 net profit was Rs 1.6 bn. West Coast Paper earned Rs 1.4 bn in the first nine months of this financial year, growing 85 per cent over a year before; the profit was nearly Rs 1.3 bn in FY17.

This is reflected in the scrips of others in the paper sector. Share prices of these companies surged to a new high last month.

Curiously enough, revenue growth has been flat for top paper makers. One reason is, most plants are operating at full capacity for over a year.

The vice-chairman at West Coast Paper, Saurabh Bangur said in an interview to a business daily that market sentiment has improved. He pointed out that "Prices of wood, 40-45 per cent of raw material cost, have been at a comfortable level in the past few quarters. We have been able to increase prices of paper by 2-2.5 per cent since December, following an increase in costs of crude oil and chemicals. Since no new capacities are coming into the market, there will be some shortage on the supply side and the market is expected to remain strong".

West Coast Paper has reduced long-term debt by Rs 1 bn in the past year. Furthermore, it has renegotiated interest rates on high cost loans. Current long-term debt is about Rs 2.75 billion.

A look at the West Coast balance sheet indicates that the finance cost was Rs 245 million in April-December of FY18 vis-a-vis Rs 434 mn in FY17 during the same period.

With the big numbers on the ascendancy, paper stocks look to go up and up. Industry reports from the USD 17bn eCommerce sector suggest Amazon and Flipkart consume 1,200-1,400 tonnes of paper that goes into making boxes and printing bills. In addition, there are the Paytm, Myntra, Jabong, FreshMenu, BigBasket, Grofers and the innumerable other such firms who require brown bags, boxes, paper.

According to research by IIFL, the Indian paper market is on the verge of outpacing the global industry. In the period FY 2018-21, industrial paper, recycled fibre-based packaging boards and copier paper segments are expected to witness healthy performance. The IIFL reports states, "The packaging boards segment, especially, is expected to post robust volumes on account of increasing demand from ecommerce and FMCG. Kraft paper or cardboard volumes are expected to increase from 4.8 million tonnes in FY17 to 6.7 million tonnes by FY21".