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With up to 500% returns in 12 months, look which is the red hot sector on Dalal Street this season

The sector’s overall operating margin stood at 20.30 per cent in FY18.

Updated: Aug 14, 2018, 12.45 PM IST
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India’s equity benchmark Sensex has risen 20 per cent in the same period, from 31,531 to 37,869.
The election season is the best time for India’s paper industry. Little wonder then that this space has started drawing much attention in recent weeks.

Analysts are gung-ho on this space, and say the domestic paper industry will continue to throw up big gainers on Dalal Street.

Two other factors are working in their favour: expectations of decent margins due to improved realisations and stable raw material costs.

Eight stocks from the sector have already multiplied investor wealth during the past 12 months. Satia Industries, top gainer from the sector, has soared 541 per cent to Rs 492.90 as of August 10 this year from Rs 76.90 last year. Others include Bio Green Paper, Victory Paper & Boards, Yash Papers, Rama Pulp & Papers, Genus Paper & Boards, Malu Paper Mills and Sree Sakthi Paper Mills, whose shares have risen between 100 per cent and 300 per cent in last one year.

India’s equity benchmark Sensex has risen 20 per cent in the same period, from 31,531 to 37,869.

The sector’s overall operating margin – a key measure that shows how much progress the paper industry has made –stood at 20.30 per cent in FY18 against 18 per cent in FY17.

“Despite a sharp rise in other input costs (ie chemicals and energy - which together account for around 25 per cent of the cost of sales), the paper industry’s operating margin improved due to better competitive position of domestic producers after global pulp prices surged 30 per cent while domestic wood prices declined around 7 per cent,” Edelweiss Investment Research said in a report.

Global pulp prices are likely to remain firm over the next 2-3 years due to incremental demand exceeding supply. This, coupled with the weakening of the rupee, should lead to improved realisations in FY19 and FY20.

After a few years of stress, the paper industry in India is now well placed, says Investec Securities. In a report, the brokerage said with growth, excess capacity has been absorbed, and companies have backward integrated through farm forestry to secure raw material (supply).

“Imports, which were an increasing threat, are reducing, owing to a depreciating rupee, high realisations for paper globally and the threat of anti-dumping duty. Finally, solid balance sheets with the stronger players, increasing cost of environmental compliance and economies of scale imply the industry is well placed to consolidate around the leaders,” it said.

“Domestic wood or bamboo prices are expected to remain stable due to increased wood supplies on account of farm forestry drive of major domestic paper producers and bamboo’s reclassification from ‘forest’ produce to ‘non-forest’ produce in December 2017 (which resulted in decline in bamboo imports in India by 21.8 per cent YoY to Rs 27.4 cr in 2MFY19). Thus, the domestic paper industry’s margins are projected to remain firm with a positive bias over the next 2-3 years,” Edelweiss said.

Shares of West Coast Paper, JK Paper, NR Agarwal Industries, Kuantum Papers, Emami Papers, International Paper APPM and Seshasayee Paper & Boards rallied in excess of 50 per cent over the past one year, while those of Shree Rama Newsprint, Star Paper Mills, Nath Pulp & Paper Mills, Shree Karthik Papers, South India Paper Mills and Pudumjee Paper have also delivered positive returns to investors during this period.

Market experts say a sharp appreciation in the rupee may reduce the competitive advantage of domestically-sourced wood compared with imported pulp amid a slowdown in the global economy, as global pulp and paper demand is linked to global economic activities. A sharp increase in prices of agricommodities as farmers may shift from wood cultivation to other crops because of improved crop economics arising from a steep increase in the prices of cash crops and government regulations, including unfavourable changes in duty structure and restrictions on water usage are some of the key risks for the industry.

Experts are bullish on a couple of paper stocks that they feel may deliver decent returns in the coming months. Edelweiss has a ‘buy’ rating on Orient Paper & Industries with a target price of Rs 51. The scrip was at Rs 39.60 on August 10. Shares of the company are down more than 50 per cent in last one year.

Shares of Rainbow Papers, TCPL Packaging, Rushil Decor, Balkrishna Paper Mills, Tamil Nadu Newsprint & Papers and Ruchira Paper have slipped between 7 per cent and 50 per cent in last one year.

On an average, paper stocks are up between 30 and 50 per cent in last 30 days and that is a meaningful jump when it comes to commodity stocks, value investor Safir Anand told ETNow during an interaction.

Having said that, the promise of price increase in paper, consumption patterns, value-added patterns and the fact that paper companies have started exporting to China for the first time, that 60 days of inventory at the minimal is now booked. If you see a meaning decline of 10-15 per cent, it may be a good time to add these stock, Anand said.

Edelweiss also has a ‘buy’ rating on JK Paper with a target price of Rs 260. The company recently posted 58.27 per cent rise in standalone profit at Rs 95.14 crore for June quarter on better operating margins and improved performance. The company had posted Rs 60.11 crore profit for April-June quarter a year ago.

Investec Securities prefers companies with raw material security and strong balance sheets, which are well placed to acquire available stressed assets. It has a ‘buy’ rating on JK Paper and Tamil Nadu Newsprint & Papers (TNPL) with price targets of Rs 220 and Rs 431, respectively, and a ‘hold’ rating on West Coast Paper Mills with a target price of Rs 334.

Writing or printing paper and paperboard are the two larger and more profitable segments in the sector, where ITC holds 4.1 per cent market share, JK Paper 2.6 per cent and TNPL 2.4 per cent, being the three largest players.

Investec Securities also highlighted that paper demand grows in tandem with GDP growth rate. Over the last 10 years (2006-2016), India’s paper demand grew 8.1 per cent, whereas GDP expanded at a CAGR of 7.3 per cent. Thus, they believe, India’s high GDP growth rate should ensure high growth in base demand for paper.
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