3 paper industry stocks which could give 20-23% return | Stock Market (2024)

China is the major consumer of paper worldwide at 106 million tonnes, followed by the US at 71million tonnes and India sharing the same scale of the population as in Chinaconsumes a very little share which makes us understand the fact that India hasa lower penetration rate and enjoys a greater scope of growth.

Talking particularly of thepackaging sector, around 55 percent of the global consumption of paper is inwrapping and packaging. India is still behind in this particular segment. The plastic used to be the first choice of manufacturers for packaging.

In the recent past, stategovernments have taken a series of measures to ban plastic and ensured strictcompliance in the plastic industry. This move has helped gain traction for the paperpackaging industry, though not fully scaled up yet, and would increase itsdemand in the coming years. Also, robust demand in the food industry, monocartons in the pharma sector, and multiple orders online are expected to drivesubstantial demand for paper packaging.

Secondly, China has banned the import of certain waste grade ofpaper owing to environmental concerns resulting in a decrease in waste paperprices. India which imports around 40 percent of waste paper stands to benefitout of the same. As already India has a scarcity of Pulpwood, the raw materialused for manufacturing paper, and in the coming years owing to environmentalconcerns this scarcity is expected to shoot up further, giving pricing power tothis industry. Attributes to this pricing power are also due to limitedproduction (68.58 lakh tones) and increase in consumption (109.27 lakh tones).

Thirdly, there is a demand bymajor players to increase import duty on paper products, currently at 0 percentas per FTA. If it does, it would also provide benefit to this sector.

Also, the “Going digital” the slogan was expected to be a major slowdown in the paper sector. But,nevertheless, it should be known that paper packaging would be a boon for thisindustry.

JK Paper| Rating: Buy | CMP: Rs122 | Target: Rs 150 | Return: 23 percent

The last quarter has been thebest for FY19. A surge in the price of paper has contributed to an upside inrevenue. Moreover, most of the pulp is derived from plantations close to theirmanufacturing units attributing to the reduction in material costs and expansion ofmargins.

The company is having twolarge integrated paper manufacturing units with a combined capacity of 4,55,000TPA and is already running at 100 percent capacity utilization. At the Sirpurplant, two machines will start producing from the second quarter and the othertwo machines will be ready for production by September-October 2019. Thereby,the full capacity will be used for production purposes by October.

This additional expansionwill help grow by at least 20 percent in volume terms. Furthermore, the expansion plan is in line for a new packaging board machine and pulp mill inGujarat, awaiting environmental clearance were an additional new board machineof 1.7 lakh tone or two lakh ton would be added.

Also, it would be putting upa pulp mill of almost 1.5 lakh ton capacity in the next two years.

The company has a healthyfinancial profile; the net debt has been brought down significantly to Rs 700crore in fiscal 2018-19 and the surplus cash being generated in going aheadwill be used for repaying the debts.

Huhtamaki PPL| Rating: Buy | CMP:Rs 259 | Target: Rs 310 | Return: 20 percent

Being having a strong legacy, aunique client base and relative inelasticity of the FMCG sector (derives 80-90percent of revenue) to economic cycles, coupled with the global footprint ofparentage, and deep market penetration; aids company to make profits in longrun.

In 2018, it suffered fromextra provisioning on account of income tax and interest. However, from Q4 CY18, most issues have been settled down and delivered vigorous Q1 CY19 results.Forthcoming, it expects topline to grow at 10-12 percent and likely to see60-80 Bps ramp up in operating margin in the next two years. But, the margingrowth depends on upcoming monsoon, the scenario of the FMCG sector and volatility incrude oil prices.

Increasing capacityutilization to a maximum of 80-85 percent, improving demand for flexiblepackaging and NASP initiatives would enable to improve its volume growth andboost revenues as well as profits ahead. In addition, the acquisition of PPILand Ajanta Packaging (India) would help to consolidate its position in pressuresensitive label business, and is likely to be EPS accretive as well, whichcould help to expand strong foothold and growth too.

International Paper APPM| Rating:Buy | CMP: Rs 428 | Target: 520 | Return: 21 percent

International Paper APPMbeing an MNC company is well placed to take advantage of the growth in paperindustry. On the front of the number, it reported pretty damn good results with EBITDAsoared 61 percent during Q4 FY 19 driven by higher sales volume, recordproduction levels, lower cost of raw material and improved operationalefficiencies. Besides, a sharp fall in interest charges added to the company’sprofitability, registering 83 percent PAT growth in Q4.

In addition, Debt has beensignificantly dwindled from Rs 180 crores to Rs 12.54 crores in FY 19 and isexpect to be brought down further moving forward. Despite its plant running at95 percent capacity utilization, it has not yet announced any significant capacityexpansion plans for subsequent years. Moreover, China’s ban on imports of lowgrade recovered paper is expected to keep global pulp prices elevated, the resultant increase in global paper prices which has improved its realizations,thereby supporting its high margin ahead.

By investing in fiber-basedmarkets, controlling costs, managing capital spending and focusing ondeliberate improvement efforts to increase productivity and efficiency, expects a company generating a strong set of numbers and free cash flow in years to come.

The Author is Senior ResearchAnalyst at Rudra Shares and Stock Brokers