JK Pa­per Ltd

Money Times - - Best Bet -

(BSE Code: 532162) (CMP: Rs.152.15) (FV: Rs.10) By Amit Ku­mar Gupta

In­cor­po­rated in 1960, New Delhi based JK Pa­per Ltd (JKPL) (for­merly Cen­tral Pulp Mills Ltd) man­u­fac­tures and sells pa­pers and boards in In­dia, USA, UK, Sri Lanka, Bangladesh, Sin­ga­pore, Malaysia, Africa, the Mid­dle East, etc. It of­fers a range of of­fice doc­u­men­ta­tion pa­pers such as pho­to­copy and multi-pur­pose pa­pers that find ap­pli­ca­tion in desk­top, inkjet and laser print­ers, fax machines, pho­to­copiers and multi-func­tional de­vices. It of­fers pre­mium wa­ter­marked and laid-marked busi­ness sta­tionery pa­pers for cor­po­rate cus­tomers and in­di­vid­u­als un­der var­i­ous brands such as JK Evervite, JK Copier, JK CMax, JK Sparkle, JK Max, JK Cedar, JK Bond, JK Ledger, etc. It also of­fers un­coated writ­ing and print­ing (W&P) pa­pers, MICR cheque pa­pers, pulp boards, bonds, ledgers, parch­ment grades, maplitho pa­pers, coated pa­pers and boards, coated pack­ag­ing boards for the pack­ag­ing in­dus­try and im­ported coated art pa­pers. We be­lieve that JKPL is in a sweet spot due to i) in­creased do­mes­tic sourc­ing of wood; ii) weak do­mes­tic prices of wood; and iii) ris­ing global pulp prices, which in­crease the cost curve. JKPL en­joys op­er­at­ing ef­fi­cien­cies be­cause of its in­te­grated pro­duc­tion ca­pac­i­ties as a sig­nif­i­cant por­tion of its wood pulp (pulp ca­pac­ity of 2,76,000 TPA) and power re­quire­ments (80 MW) are met through cap­tive pro­duc­tion. Fur­ther, to re­duce its de­pen­dency on third party for raw ma­te­rial sourc­ing, JKPL runs so­cial forestry and farm forestry in Odisha, Gu­jarat, Ma­ha­rash­tra and Andhra Pradesh, cov­er­ing a to­tal area of 1,50,000 hectares, which helps them source ~52% of the to­tal raw ma­te­rial con­sump­tion. Fur­ther, the re­clas­si­fi­ca­tion of bam­boo from for­est pro­duce to non-for­est pro­duce will in­crease the wood sup­ply in the do­mes­tic mar­ket in the long run even­tu­ally ben­e­fit­ting the lo­cal com­pa­nies. Be­sides this, JKPL is also fo­cused on sourc­ing 71% of its raw ma­te­rial re­quire­ment from within a ra­dius of 200 kms, which re­sults in re­duced lo­gis­tics cost. Given the cap­tive pro­cure­ment (52%) of raw ma­te­ri­als and lower lo­gis­tics costs, we ex­pect op­er­at­ing mar­gins to ex­pand by 400 bps in FY19E to re­main in the range of 24-25% in FY20E and FY21E from 21.5% in FY18. The ex­pan­sion in mar­gins is also sup­ported by in­crease in av­er­age re­al­iza­tion in a ris­ing global cost curve sce­nario. We ex­pect re­al­iza­tion to re­main firm for FY20 and FY21.

JKPL is a leader in In­dia's copier pa­per seg­ment with a mar­ket share of 23%, the sec­ond-largest in the coated pa­per seg­ment with a mar­ket share of 12% and a lead­ing player in the pack­ag­ing board seg­ment with a mar­ket share of 11%.

Its pres­ence in the copier pa­per, coated pa­per and flex­i­ble board seg­ments is rel­a­tively less frag­mented com­pared to the pa­per in­dus­try. We be­lieve that JKPL’s po­si­tion will strengthen fur­ther in terms of prod­uct of­fer­ings and help gain mar­ket share with the op­er­a­tion of Sir­pur unit (start­ing FY20E) and com­ple­tion of brown­field ex­pan­sion plan of 2,00,000 tonnes in Gu­jarat. Be­sides this, its strong mar­ket­ing and dis­tri­bu­tion poli­cies as­sure faster prod­uct reach and bet­ter con­nect with the mar­ket.

JKPL had shown in­ter­est in mul­ti­ple as­sets but due to dis­agree­ments on val­u­a­tions, the deals didn’t ma­te­ri­al­ize. This shows the man­age­ment’s con­ser­va­tive ap­proach. How­ever, JKPL suc­cess­fully ac­quired Sir­pur Pa­per Mill with an in­stalled ca­pac­ity of ~138 KT (~30% of JKPL’s cur­rent ca­pac­ity) by in­fus­ing Rs.3.71 bil­lion post NCLT (Na­tional Com­pany Law Tri­bunal) ap­proval. This con­sists of a cash pay­ment of Rs.1.66 bil­lion and is­sue of eq­uity shares of Rs.430 mil­lion and pref­er­ence shares of Rs.1.62 bil­lion. The man­age­ment ex­pects this plant to be fully op­er­a­tional in Q1FY20E. We be­lieve this ac­qui­si­tion will be EPS ac­cre­tive to the com­pany, sup­ported by sub­si­dies given by the Te­lan­gana gov­ern­ment in terms of wood, coal and elec­tric­ity duty.

The gov­ern­ment re­cently im­posed anti-dump­ing duty (ADD) on cer­tain kinds of un­coated pa­per from In­done­sia, Thai­land and Sin­ga­pore for a pe­riod of three years to pro­tect the in­ter­est of do­mes­tic com­pa­nies. We ex­pect JKPL to gain on the im­po­si­tion of ADD since its un­coated W&P pa­per ca­pac­ity stands at 292 KT (third largest). ADD will be ben­e­fi­cial to the pa­per in­dus­try in a fall­ing re­al­iza­tion sce­nario.

Tech­ni­cal Out­look: The stock looks good on the daily chart for medi­umterm in­vest­ment. It has formed a small down­ward chan­nel and trades near im­por­tant mov­ing av­er­ages like the 200 DMA level on the daily chart.

Start ac­cu­mu­lat­ing at this level of Rs.152.15 and on dips to Rs.130 for medium-to-long term in­vest­ment and a pos­si­ble price tar­get of Rs.190+ in the next 6 months.

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