JK Paper Ltd - Research Report

Private Client Research

Rating

Buy

Sector

Paper & Paper Products

Company

JK Paper Ltd

Paper & Paper Products


September 01, 2017

Sensex: 31892.23


CNX Nifty: 9974.40

NSE: JKPAPER


BSE: 532162

Reco Price
Rs. 101.75
Price Target (1.5 - 2 Years)
Rs. 205.00
Upside
101.47%

Date

September 01, 2017

Sensex

31892.23

CNX Nifty

9974.40

Exchange

Code

NSE

JKPAPER

BSE

532162

Stock Data

CMP (Rs)
104.30
Face value (Rs)
10
52 Week Range (Rs)
122.50 - 55.55
Market cap (Rs Crores)
1759.65
Price To Book Value (x)
1.35
P/E Ratio (x)
9.98
EV/EBIDTA (x)
6.23

One Year indexed Stock Performance

JK Paper Ltd Sensex
JK Paper Ltd
Return (%)
1m
3m
12m
36m
Absolute
9.86
-1.00
72.95
248.49
Sensex
-2.10
2.42
12.20
18.70

Shareholders

(in %)
30-Jun
Promoter
50.78
Public
49.22
Others
0.00
Total
100

+91 22 6639 3000

research@stockaxis.com

Increase in Demand and operational efficiency will lead to future growth of the company.

Improving Operational Efficiency:
JK Paper Limited (JK Paper) is a key player in the paper industry over the last 78 years. The company is improving its operating efficiency on yield, energy and usage parameters. The company has been able to reduce its raw materials cost by increasing the area under plantation over the last four years; this results in reducing its logistics costs. The company has been able to achieve local sourcing in its Odisha plant to the extent of about 60%; in case of its Gujarat plant, local sourcing is 100%.

Wide Distribution Network
JK Paper has a robust distribution network spread across the country spanning over more than 4,000 dealerships. This has helped the company gain domestic market share.

The company also exports its products to more than 40 countries including Sri Lanka, Middle East, Bangladesh, Malaysia, Singapore, Australia, Africa, etc.

Debt Reduction:
The company has reduced its debt from Rs. 1,900 crores in FY14 to the current Rs. 1,400 crores. The company plans to reduce its debt by Rs.250-300 crores each year till it achieves a comfortable debt-equity ratio. The company aims to achieve debt reduction by improving working capital management efficiency, which, in turn, will save finance costs. Additionally, the company will be able to improve its credit rating with debt reduction, which will reduce interest costs.

High demand:
At present, India consumes a lower amount of paper in comparison to other nations; India’s per capita consumption of paper is about 11 kgs vis-à-vis 57 kgs which is the global average consumption of paper. Rising consumerism, greater levels of literacy, rising levels of retailing and increasing amounts of documentation requirements in the economy will result in maintaining demand for paper at a high level. Consumerism and the pharma sector have been especially responsible for increase in demand for packaging paper and paper boards. India is currently the fastest growing paper market in the world.

Change in Mix:
While demand for paper across various segments is expected to rise, there is an expectation of varying levels of demand for different kinds of paper. While demand for craft paper and packaging boards is expected to rise at steep levels due to higher literacy, rise in retailing, e-commerce, etc., demand for writing and printing paper is expected to rise at a lower rate. There has been a shift in preference for better quality paper, which is beneficial for the writing and printing segments of the industry.

Copier paper, in which JK Paper is the leader, is growing at 7%, driven by increasing levels of literacy and service sector growth. Overall, growth in paper demand over the next five years is estimated at about 6-7%.

Probability of Acquisitions:
JK Paper is raising about $50 million from the World Bank’s private sector lending arm - International Finance Corp. (IFC). IFC will buy secured non-convertible debentures (NCDs) sold by JK Paper and will also help the company improve its productivity and restructure its balance sheet. Apart from this, the company is looking for acquisition opportunities since it is currently operating at 100% capacity utilization. Acquisitions will help the company strengthen its market position. It is currently the market leader in the branded copier paper segment and among the top two in coated paper and high-end packaging boards.

 

Industry

The Indian paper industry has been growing at about 7% over the last five years. Two consecutive years of drought badly affected rural demand and agricultural growth, which impacted demand for paper. India ranks among the top 15 paper producing countries in the world, with a total installed capacity of 14.5mn TPA. Even as paper consumption has steadily increased, India’s per capita consumption has remained at a meagre 11 kgs whereas the global average is of 58 kgs. Industry revenue growth of 7-8% is likely (primarily volume growth) driven by faster economic growth, strong emphasis on education, growth in number of printing presses, etc. 

Profile

JK Paper Limited is part of the JK Group (late Shri Lakshmipat Singhania family) and is led by Shri Bharat Hari Singhania (Chairman) and Harsh Pati Singhania (VC and MD). The group has been in the paper industry for 78 years, having commenced operations with a 3600 TPA board mill at Bhopal in 1938.

Today, JK Paper is one of the largest wood based paper manufacturers in India, with two fully integrated manufacturing facilities, having a total capacity of 4,55,000 TPA (pulp, paper and board) along with 85MW of power generation for captive use – JK Paper Mills (JKPM) at Jaykaypur in Rayagada district of Odisha, Eastern India and Central Pulp Mills (CPM) at Songadh in Gujarat, Western India.

Profit & Loss Statement:- (Consolidated)

(Rs Crores)

DESCRIPTION Mar-14 Mar-15 Mar-16 Mar-17 Mar-18E Mar-19E
Net Sales 1737.93 2160.11 2437.25 2628.61 2865.18 3151.70
Growth (%)   24.29 12.83 7.85 9.00 10.00
Total Expenditure 1597.14 1901.72 2048.12 2111.91 2277.82 2521.36
EBITDA 140.79 258.39 389.13 516.70 587.36 630.34
% Margin 8.10 11.96 15.97 19.66 20.50 20.00
Other Income 12.64 8.96 13.18 35.15 35.00 35.00
Operating Profit 153.43 267.35 402.31 551.85 622.36 665.34
Interest 128.53 205.35 195.23 187.64 168.00 160.00
PBDT 24.90 62.00 207.08 364.21 454.36 505.34
Depreciation 126.52 115.76 118.29 120.68 125.00 130.00
Profit Before Taxation & Exceptional Items -101.62 -53.76 88.79 243.53 329.36 375.34
Exceptional Income / Expenses -17.49 -5.82 0.00 0.00 0.00 0.00
Tax -44.40 -41.16 28.05 69.04 98.81 112.60
Profit After Tax -74.71 -18.42 60.74 174.49 230.55 262.74
Adjusted EPS -5.47 -1.35 3.77 11.02 14.56 16.59
Source: Stockaxis Research, Company Data

Valuation

Realizations is improving, which is led by increase in demand and also supply constraints. In addition to this, cost efficiency and economies of scale kicked in. Growth will be on the back of increasing demand from the education and corporate sectors. Sub-segments such as packaging boards are likely to grow on the back of increasing penetration of e-commerce as well as growth in the FMCG industry.

We Initiate ‘BUY’ on attractive valuations with Target Price of Rs 205 based on 12.35x FY19E EPS. The stock trades at 7.00x FY18E and 6.10x FY19E EPS.