Pa­per Stocks: Fly­ing High On Ro­bust De­mand

Pa­per stocks have gained mo­men­tum, of late. Lo­hit Bharambe and Nikita Singh iden­tify pa­per stocks that one can bet on at the cur­rent junc­ture.

Dalal Street Investment Journal - - CONTENTS -

The Modi gov­ern­ment’s per­se­ver­ance to­wards Dig­i­tal In­dia has paved the way for growth for most of the in­dus­tries, ex­cept the pa­per in­dus­try. The push to­wards a cash­less econ­omy fol­lowed by the GST roll-out has ag­gra­vated the pes­simism in pa­per in­dus­try. How­ever, con­sid­er­ing tra­di­tional prac­tices still fol­lowed in al­lied sec­tors and in­dus­tries such ed­u­ca­tion, print me­dia, tis­sue pa­pers and pack­ag­ing, the pa­per in­dus­try still holds some scope for growth. In­dian pa­per in­dus­try has cre­ated sus­tain­able liveli­hood in ru­ral ar­eas and has helped gen­er­ate em­ploy­ment for the lo­cal pop­u­lace, es­pe­cially for women, who earn their liveli­hood through this in­dus­try. The pa­per in­dus­try em­ploys about 20 lakh peo­ple, in­clud­ing those em­ployed di­rectly and in­di­rectly. Ac­cord­ing to In­dian Pa­per Man­u­fac­tur­ers As­so­ci­a­tion (IPMA), the In­dian pa­per in­dus­try ac­counts for about 3% of the world’s pro­duc­tion, with the turnover of the in­dus­try es­ti­mated at 50,000 crore.

The pa­per in­dus­try is frag­mented into writ­ing and print­ing pa­per (WPP), in­dus­trial pa­per (IP), newsprint (NP) and spe­cialty pa­per (SP), out of which IP caters to 50% of to­tal de­mand ma­jorly for cor­ru­gated boxes. The WPP caters to

30% of the de­mand. The de­rived pa­per print­ing in­dus­try is termed to be the sec­ond most em­ploy­able in­dus­try in In­dia af­ter China and has posted a growth of 15-17%, while com­mer­cial print­ing grew by about 4% in FY2017.

In­dia’s per capita con­sump­tion of pa­per and board, which stands a lit­tle over 13 kg, is way be­hind the global av­er­age of 57 kg. In­dia’s con­sump­tion is lower than not only most of the de­vel­oped coun­tries but also con­sid­er­ably lower than many of the emerg­ing coun­tries. The biggest threat to pa­per stocks is that the pa­per in­dus­try is ma­jorly dom­i­nated by un­or­ga­nized play­ers, with a to­tal of nearly 825 small and large mills. More­over, pa­per com­pa­nies are ma­jorly seen im­port­ing their biggest raw ma­te­rial, wood pulp and waste pa­per, the rea­son be­ing lower global prices com­pared to do­mes­tic in­dus­try and un­avail­abil­ity of de­graded for­est land for pulp­wood. Wood plan­ta­tion and pulp stor­age are the biggest bot­tle­necks In­dia is fac­ing today. The de­mand for pa­per in In­dia is 15MT per an­num, while the coun­try pro­duces only 12MT. The pa­per mar­ket in In­dia, be­ing the fastest grow­ing pa­per mar­ket in the world, is ex­pected to cre­ate de­mand growth of around 6-7% go­ing for­ward. This is ex­pected to wi­den the de­mand-sup­ply mis­match fur­ther.

The im­ports of pa­per, pa­per­board and newsprint into In­dia have been steadily in­creas­ing. In the last five years, im­ports have risen at a CAGR of 11.4% in value terms (from 7,152 crore in 2010-11 to 12,284 crore in 2015-16), and 7.9% in vol­ume terms (from 1.8 mil­lion tonnes in 2010-11 to 2.6 mil­lion tonnes in 2015-16), as per IPMA. How­ever, pa­per mills are sit­ting on their idle ca­pac­ity amid lower do­mes­tic de­mand. Af­ter the US im­posed higher anti-dump­ing duty on pa­per and pa­per­board sup­ply from In­done­sia and China, th­ese coun­tries have shifted their fo­cus to In­dia. The do­mes­tic cost of pro­duc­tion of fin­ished pa­per is much higher, re­sult­ing in higher do­mes­tic prices. Due to this, pa­per and pa­per­board im­ports in In­dia rose by 28% in FY17. Re­cently, higher de­mand and si­mul­ta­ne­ously ris­ing wood pulp prices glob­ally have re­sulted in in­creas­ing prices of pa­per world­wide.

Nev­er­the­less, to curb this, many com­pa­nies have started back­ward in­te­gra­tion or put up cap­tive plan­ta­tion fa­cil­i­ties in or­der to im­prove op­er­a­tional ef­fi­cien­cies and save costs. The cost of raw ma­te­rial has rel­a­tively de­clined as com­pared to the last year amid higher avail­abil­ity of catch­ment area. The pa­per com­pa­nies have been seen shift­ing their plants from South to North due to bet­ter avail­abil­ity of wa­ter in the North, as against the wa­ter short­age in the South.

Even, In­dian Pa­per Man­u­fac­turer As­so­ci­a­tion has pro­posed to the gov­ern­ment to in­clude pa­per mills in the ‘Make in In­dia’ project so as to cut im­ports and pro­mote do­mes­tic ex­pan­sion. More­over, com­plete digi­ti­sa­tion would prove more haz­ardous as pa­per waste is eas­ier to de­com­pose than e-waste, and wood, which is the biggest raw ma­te­rial, can be mul­ti­plied by plant­ing more or re­cy­cling. Con­sid­er­ing fi­nan­cial per­for­mance of or­ga­nized play­ers in In­dia, Pudum­jee Pa­per Prod­ucts Ltd, Emami Pa­per Mills Ltd, NR Agar­wal In­dus­tries Ltd, South In­dia Pa­per Mills Ltd and Tamil Nadu Newsprint & Pa­pers Ltd can be con­sid­ered as the top five com­pa­nies to have posted ex­u­ber­ant CAGR in their to­tal in­come and PAT over FY15-17. Pudum­jee Pa­per Prod­ucts, which got listed in March 2016, posted 96% PAT growth and has si­mul­ta­ne­ously wit­nessed its stock price surg­ing nearly 97% since its list­ing. Fur­ther, NR Agar­wal In­dus­tries, the maker of pa­per prod­ucts, ma­jorly du­plex board and craft pa­per, wit­nessed PAT re­vival af­ter net loss in FY15, driven by rise in prices of its prod­ucts and con­cur­rently lower cost of pro­duc­tion amid re­us­able pa­per and me­chan­i­cal de-inked pa­per pulp used as raw ma­te­ri­als. The price move­ment, ac­cord­ingly, surged 226% CAGR in two years. How­ever, the largest do­mes­tic pa­per pro­ducer, Bal­larpur In­dus­tries, suf­fered rev­enue de-growth and ex­pan­sion in net losses amid fi­nan­cial crunch, while Tamil Nadu Newsprint with­stood the wa­ter crunch in South In­dia and man­aged to sus­tain its prof­its. Nev­er­the­less, nearly 85% of the pa­per in­dus­try stocks have posted ex­cel­lent per­for­mances in their prices over FY15-17. Thereby, de­spite Dig­i­tal In­dia cam­paign and com­pe­ti­tion due to cross-bor­der dump­ing, the com­pa­nies have been able to main­tain their prof­its. The rea­sons for this suc­cess are many, in­clud­ing di­ver­si­fi­ca­tion, back­ward in­te­gra­tion, ex­port qual­ity pro­duc­tion, shift­ing of plants to ar­eas where wa­ter avail­abil­ity is bet­ter, etc.

In­dia is still a devel­op­ing coun­try and, as such, a ma­jor chunk of the pop­u­la­tion still prefers tra­di­tional way of liv­ing and, there­fore, im­ple­ment­ing Dig­i­tal

In­dia cam­paign all over the coun­try would take some more years. More­over, the re­place­ment of plas­tic prod­ucts by pa­per prod­ucts in a big way pro­vides big room for pa­per prod­ucts and gives more in­no­va­tive ways out to sus­tain. jor­ity of the stocks from the pa­per in­dus­try have man­aged to de­liver ro­bust re­turns in the past three years. The stocks, namely Kushal Tradelink, Star Pa­per Mills, NR Agar­wal In­dus­tries, Ruchira Pa­pers and Kuan­tum Pa­pers, reg­is­tered hand­some gains in the past three years. One of the stocks that stands out in this sec­tor is Kushal Tradelink which was quot­ing around 2.83 as on Septem­ber 19, 2014 and as on Septem­ber 19, 2017, its price stood at 121.35, which makes this stock the top gainer in this sec­tor.

On the other hand, there were few com­pa­nies which de­liv­ered neg­a­tive re­turns such as Bal­larpur In­dus­tries and In­ter­na­tional Pa­per APPM. Over­all, the stocks of pa­per in­dus­try have per­formed pretty well.

Source: IPMA (In­dia pa­per Man­u­fac­tur­ers As­so­ci­a­tion)

Source: Sanase­cu­ri­ties.com

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