• Mayank Mehraa CFA, FRM

JKPaper- Branded Printing Paper

A year ago we had downgraded our views on the entire paper industry owing to the awareness among masses to save paper and a sudden shift to emails and online note taking etc. However, it seems like no matter what we do we have to eventually continue printing paper. Since a year packaging and printing paper consumption has shot up to new highs. Indian paper usage per capita used to be very low in comparison to other emerging markets but as of late it has been growing, key factors- electrification of rural India Is opening markets to education and thus printing in terms of books, notebooks etc. While service providers push for green bills or email invoices, cheaper and more affordable printing solutions encourage printing such invoices for record keeping etc. E- Commerce however requires a lot of paper work for every consignment right from order generation to processing and right until final delivery. Important states have election across November to December and next year Lok Sabha elections too should shoot up paper demands. Keeping all this in mind we found JK PAPER which has a dominant market share in printing paper market, decent market shares in paper board and packaging and post completion of Sirhpur Paper Mills would be the 2nd largest in size, next only to ITC.


JK PAPER (CMP- 110)

JK Paper Ltd. has two large integrated paper manufacturing units – JK Paper Mills, Rayagada, Odisha and Central Pulp Mills, Songadh, Gujarat with a combined capacity of 4,55,000 TPA. It is the market leader in Branded Copier paper segment and among the top two players in Coated Paper and high-end Packaging Boards. However, West Coast Paper makes for a strong competition to JKPaper in terms of fundamentals. We would be watching very carefully for the FCCB repayment due for completion this year, post which the company would look even more appealing than now. A Strong diversified management team along with a high promoter holding of 48% ensures us of aligned interests with minority share holder. Trading at a close to Rs. 2000 Cr Market Capitalisation viz.- 70% of Annual Revenues and 1.1x Book Value of the company. Allowing us the opportunity to invest in a growth stock and cheap valuations.

Valuation 

JK Paper currently trading at a single digit PE of 5.7x looks much less risky as compared to the growth outlook. Growth should be majorly triggered by lower pulp prices and lesser Chinese imports. JKPaper gets most of its pulp from plantations close to their manufacturing units- reducing material costs and expanding operational margins which currently (as at March'18) are at 22% vs 12% in March' 2015. Borrowings have reduced from 2089 Cr in 2015 to 1310 Cr in 2018, which reduces interest burden increasing profit margins. If the company were to even stop growing and have the same revenues backed by debt reduction, we estimate the price per share to be at Rs. 260. However, we can't precisely value the impact of reduction of Chinese Supply since we aren't sure of its persistence.  

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Following Up
  1. FCCBs have been repaid.

  2. Sirhpur paper mills acquisition completed.

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