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Manali Bhatia
China is the major consumer of paper worldwide at 106 million tonnes, followed by the US at 71
million tonnes and India sharing the same scale of the population as in China
consumes a very little share which makes us understand the fact that India has
a lower penetration rate and enjoys a greater scope of growth.
Talking particularly of the
packaging sector, around 55 percent of the global consumption of paper is in
wrapping 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, state
governments have taken a series of measures to ban plastic and ensured strict
compliance in the plastic industry. This move has helped gain traction for the paper
packaging industry, though not fully scaled up yet, and would increase its
demand in the coming years. Also, robust demand in the food industry, mono
cartons in the pharma sector, and multiple orders online are expected to drive
substantial demand for paper packaging.
Secondly, China has banned the import of certain waste grade of
paper owing to environmental concerns resulting in a decrease in waste paper
prices. India which imports around 40 percent of waste paper stands to benefit
out of the same. As already India has a scarcity of Pulpwood, the raw material
used for manufacturing paper, and in the coming years owing to environmental
concerns this scarcity is expected to shoot up further, giving pricing power to
this industry. Attributes to this pricing power are also due to limited
production (68.58 lakh tones) and increase in consumption (109.27 lakh tones).
Thirdly, there is a demand by
major players to increase import duty on paper products, currently at 0 percent
as 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 this
industry.
JK Paper | Rating: Buy | CMP: Rs
122 | Target: Rs 150 | Return: 23 percent
The last quarter has been the
best for FY19. A surge in the price of paper has contributed to an upside in
revenue. Moreover, most of the pulp is derived from plantations close to their
manufacturing units attributing to the reduction in material costs and expansion of
margins.
The company is having two
large integrated paper manufacturing units with a combined capacity of 4,55,000
TPA and is already running at 100 percent capacity utilization. At the Sirpur
plant, two machines will start producing from the second quarter and the other
two machines will be ready for production by September-October 2019. Thereby,
the full capacity will be used for production purposes by October.
This additional expansion
will 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 in
Gujarat, awaiting environmental clearance were an additional new board machine
of 1.7 lakh tone or two lakh ton would be added.
Also, it would be putting up
a pulp mill of almost 1.5 lakh ton capacity in the next two years.
The company has a healthy
financial profile; the net debt has been brought down significantly to Rs 700
crore in fiscal 2018-19 and the surplus cash being generated in going ahead
will be used for repaying the debts.
Huhtamaki PPL | Rating: Buy | CMP:
Rs 259 | Target: Rs 310 | Return: 20 percent
Being having a strong legacy, a
unique client base and relative inelasticity of the FMCG sector (derives 80-90
percent of revenue) to economic cycles, coupled with the global footprint of
parentage, and deep market penetration; aids company to make profits in long
run.
In 2018, it suffered from
extra provisioning on account of income tax and interest. However, from Q4 CY
18, 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 see
60-80 Bps ramp up in operating margin in the next two years. But, the margin
growth depends on upcoming monsoon, the scenario of the FMCG sector and volatility in
crude oil prices.
Increasing capacity
utilization to a maximum of 80-85 percent, improving demand for flexible
packaging and NASP initiatives would enable to improve its volume growth and
boost revenues as well as profits ahead. In addition, the acquisition of PPIL
and Ajanta Packaging (India) would help to consolidate its position in pressure
sensitive label business, and is likely to be EPS accretive as well, which
could help to expand strong foothold and growth too.
International Paper APPM | Rating:
Buy | CMP: Rs 428 | Target: 520 | Return: 21 percent
International Paper APPM
being an MNC company is well placed to take advantage of the growth in paper
industry. On the front of the number, it reported pretty damn good results with EBITDA
soared 61 percent during Q4 FY 19 driven by higher sales volume, record
production levels, lower cost of raw material and improved operational
efficiencies. Besides, a sharp fall in interest charges added to the company’s
profitability, registering 83 percent PAT growth in Q4.
In addition, Debt has been
significantly dwindled from Rs 180 crores to Rs 12.54 crores in FY 19 and is
expect to be brought down further moving forward. Despite its plant running at
95 percent capacity utilization, it has not yet announced any significant capacity
expansion plans for subsequent years. Moreover, China’s ban on imports of low
grade 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-based
markets, controlling costs, managing capital spending and focusing on
deliberate 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 Research
Analyst at Rudra Shares and Stock Brokers
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The views and investment tips expressed by investment expert on here are his own and not that of the website or its management. We advise users to check with certified experts before taking
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source:- https://www.moneycontrol.com/news/business/stocks/demand-of-import-duty-gives-pricing-power-to-paper-industry-3-stocks-could-give-20-23-return-4151431.html
source:- https://www.moneycontrol.com/news/business/stocks/demand-of-import-duty-gives-pricing-power-to-paper-industry-3-stocks-could-give-20-23-return-4151431.html
