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.
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.