JK Paper Ltd
(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.