Opportunities in the paper sector

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Stocks of paper producers have been doing well in the last few months, outperforming the broader markets by a huge margin. Against a four per cent rise in the BSE Sensex, stocks of major paper companies have risen 26-66 per cent since end-March. Improving prospects are one of the key reasons driving the stock prices higher, which are also reflected in the good set of results for the June quarter (see table).

“On the back of higher demand, increase in paper prices and better capacity utilisations, paper companies have been able to report better revenue and profit growth. As demand continues to be better, we think companies should be able to maintain margins as a result of lower input prices and higher capacity utilisations,” says Sridhar Chandrasekhar, head, Crisil Research.

Paper and newsprint prices, which were flat to down in the calendar year 2009, have firmed up in recent months. During the month of July, prices for Creamwove ( Rs 41,000 a tonne) and Maplitho ( Rs 52,205 a tonne), which are classified as writing and printing paper, respectively, were trading higher by about five and nine per cent, respectively, on a year-on-year basis.

Additionally, after April this year, the price of key input pulp – which had touched almost $1,000 a tonne (from $500 a tonne in April 2009) due to an earthquake in major paper pulp producer Chile – has corrected to $700 levels currently. This should ease any pressure on the margins of companies.

From here, estimates suggest paper and paperboard demand should grow at seven per cent annually from 7.9 million tonnes to 10.4 million tonnes from 2009-10 to 2013-14. Higher demand will be led by healthy growth in industrial production and demand recovery in consumer goods. Also, the government’s thrust on education, revival in the print media coupled with growth in overall economy should mean higher demand for writing and printing paper. We look at the prospects of four major companies:

ROBUST PERFORMANCE
In RscroreBallarpur
Inds		T N
Newspint		West Coast
Paper		JK Paper
Net Sales1,077290189291
% chg 48.762.328.411.5
Net profit65401529
% chg 75.8458.4-27.244.4
OPM (%)22.131.021.222.9
CMP ()341409460
Mkt-cap 2,258968591469
PE (x)*9.46.112.04.7
Financial figures are for June 2010 quarter; *TTM: Trailing 12 months
Source: Capitaline, % change is compared to June quarter 2009

Ballarpur Industries
Led by higher capacity and better realisations, Ballarpur Industries (BILT), India’s largest paper producer, reported a 76 per cent rise in net profit for the June quarter. This reflects the benefit from the recent increase in capacity of wood-free paper from 125,000 tonnes to 315,000 tonnes (commercial production started in the second half of 2009-10). The gains will further accrue to the company as the utilisation levels increase.

Besides, BILT is acquiring Premier Tissues India, which will make it the largest player in the tissues segment. A possible listing of its 79.53 per cent subsidiary, Ballarpur International Graphic Paper Holdings (BIGPH), in London or Singapore could be a positive as its holding in BIGPH is valued at Rs 25 per share of Ballarpur. Overall, Ballarpur’s stock is valued at Rs 45 per share as against its current market price of Rs 35.

JK Paper
JK Paper has embarked on a Rs 1,500-crore expansion plan, which will help it expand its production capacity from the current 240,000 tonnes to 360,000 tonnes over the next two years. With about 40 per cent market share, JK Paper leads the fast growing branded paper segment, which is expected to grow at about 12-14 per cent. Analysts expect JK Papers’ earnings to grow 12-15 per cent over the next two years. The stock is currently trading at five times its 2011-12 estimated earnings.

TNPL
Tamil Nadu Newsprint & Papers (TNPL), a leading player in the domestic newsprint category, has been a key beneficiary of the revival in demand. In fact, TNPL is increasing its annual paper capacity from 245,000 tonnes to 400,000 tonne by September, which will also ensure higher volumes in the coming quarters. Analysts are expecting the company’s revenue and earnings to grow 18-20 per cent annually over the next two years. The stock has been the biggest outperformer among the four, and currently trades at 7 times its FY11 and 6 times FY12 estimated earnings. Investors, thus, should wait for a correction before considering an investment.

West Coast Paper Mills
West Coast Paper Mills is an integrated player focusing on high-quality writing and printing paper (also known as copier paper), where demand is higher and expected to grow 14-16 per cent over three-four years. In May, the company completed the expansion of its production capacity from 180,000 tonnes to 315,000 tonnes. On the back of this and the improvement in margins, the company’s profits are expected to double in the current fiscal year and grow another 20-25 per cent in 2011-12. Analysts estimate the stock’s value at about Rs 130 per share, including the value of its 36 per cent stake in Rama Newsprint (valued at Rs 4 per share).



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