Margin pressure may hit paper cos in near term
Investor interest in paper stocks appears to be far from over despite the near-term headwinds. Though robust demand supports expectations of strong earnings, analysts caution that the rise in input cost for paper manufacturers is likely to squeeze their margin.
The rally in paper stocks began early September when states further eased Covid-19 related restrictions and announced the re-opening of schools and offices. It picked up pace recently amid reports of likely imposition of anti-dumping duty on decor paper imports from China, and expectations of further price hikes due to an increase in the cost of raw material.
“After the re-opening of offices and schools, paper demand has been robust and price hikes have been seen across all categories. However, due to increased fuel prices and container shortage, the cost of shipping a container of paper overseas has increased. Further, pulp price, the raw material of paper and corrugated boxes, have shot up, too, on demand-supply mismatch,” highlights Likhita Chepa, senior research analyst at Capitalvia Global Research.
All these factors, she says, have forced paper manufacturers and distributors to hike prices domestically.
According to industry reports, most paper mills have hiked paper prices by ~2,000-3,000 per mt for October deliveries, after a 10-12 per cent hike last month. Going ahead, Chepa expects paper prices to rise further by 6 to 8 per cent.
On the regulatory front, a September 28 notification by the Directorate General of Trade Remedies (DGTR) has recommended anti-dumping duty between $110 per mt and $542 per mt of decor paper imports from China.
The investigation, which was initiated after a complaint by ITC, revealed that due to increased import (in absolute terms), the profitability of the domestic industry has shown negative growth between April 2016 and March 2020.
Of the 24,227 mt of decor paper India produces, 70 per cent to 80 per cent comes from ITC. Pudumjee Paper Products and Shree Krishna Paper Mills & Industries are the other key domestic manufacturers of the product.
Road ahead
Analysts believe the industry may witness demand uptick during the ongoing financial year on a year-onyear basis backed by better paper demand and increase in its prices but higherthan-expected rise in transportation costs may put pressure on the margin in the near-term.
“We believe with the reopening of the economy and higher demand for paper products in the domestic market, sales will improve. However, high raw material and other expenses may keep margins under pressure,” says Ajit Mishra, Vpresearch at Religare Broking.
From an investment view, Likhita Chepa suggests incumbent investors can hold these stocks from a medium-to-long-term perspective but new investors can either wait for a better entry point after a recent run-up or pick stocks from other sectors, which are more likely to benefit from economic revival.
Stock prices of paper companies, such as Pudumjee Paper Products, JK Paper, Emami Paper Mills, and Star Paper Mills, have rallied between 31 per cent and 96 per cent during the past six months, compared with a 22 per cent gain in the Nifty50 index and a 24 per cent rally in the Nifty500 index, ACE Equity’s data show.
Since September, the stock prices have gained up to 23 per cent. In comparison, the Nifty50 and the Nifty500 indices are up 4 per cent and 5 per cent, respectively.
Mishra, too, advises investors to be very selective and recommends JK Paper and West Coast Paper from a long-term perspective.
“We expect players like JK Paper to do well going forward in the copier paper space since their Gujarat plant is going on stream. Besides, owing to strong demand from the packaging segment for Boards and Apparel, West Coast Paper is another player which could fare well this fiscal,” concurs S Ranganathan, head of research at LKP Securities.