JK Paper a long-term play on documentation demand

The manufacturing and services sectors have been showing consistent growth over the last few quarters. With improving economic conditions, increased spending by corporates and individuals has led to growing activities in sales and services leading to more documentation. JK Paper Ltd is set to benefit from this increased demand.

Business: JK Paper Ltd (JKPL) is part of the JK Group, which has a significant presence in automotive tyres, cement, v-belts, oil seals, agri-seeds and pulp & paper. The New Delhi-based company is engaged in manufacturing and sales of writing and printing paper products.

The company’s products comprise office documentation papers (photocopy and multipurpose printing), coated and uncoated paper and boards (for notebooks, calendars, brochures and folders), stationery products, bond paper, parchment, ledger and MICR cheque papers.

Additionally, JKPL offers high-end coated packaging boards for packaging industry under the brand names like JK TuffCote, JK Ultima, etc.  JKPL is a leading player in the domestic paper segment with a total capacity of around 2.4 lakh tonnes per annum (tpa) of paper and pulp. The company has two integrated pulp and paper plants, JK Paper Mills in Rayagada, Orissa with a capacity of 1.27 lakh tpa and Central Pulp Mills in Songadh, Gujarat with 1.13 lakh tpa production capacity.

The company has a 46,000 tpa coating plant at its Orissa unit, which employs superior blade coating technology to produce international quality coated art paper and boards.
JKPL has been concentrating progressively in developing raw material resource base in the mills’ catchment areas by encouraging social farm forestry programmes.

Till date, over 71,000 hectares have been covered in Orissa, Andhra Pradesh, Gujarat and Maharashtra. The farm forestry area covered during 2008-09 was over 6,300 hectares, utilising over 37 million seedlings/plants.

Investment rationale: With economic growth picking up, demand for paper and boards would continue to grow at an expected compound annual growth rate of 9-10%. JKPL is market leader in the copier segment with over 30% market share. JKPL, a pioneer in branded products, would benefit from growth in industries such as IT, telecom, automobile and housing, increasing thrust on education, growing personal computing and printing, and development of the retail sector.

Also JKPL has been focusing on adding new products and shifting its product mix towards value-added branded products which account for 90% of its sales revenues. The packaging board requirement is increasing at over 15% per annum. JKPL, which ranks second in the packaging board segment with over 24% market share, would also benefit from increased usage of packaging boards.

JKPL also has good export footprint for high value branded products in the Middle East, South East Asia, Saarc and various African countries. JKPL plans to set up additional capacity of around 1.5 lakh tpa with capital outlay of Rs 1,400 crore. This would increase its capacity to 4 lakh tpa in next 2 to 2.5 years time and help to increase its revenue by around Rs 800 crore per year. Full capacity utilisation and proposed expansion plans would ensure additional revenues in coming 2-3 years time.

Concerns: Any slowdown in the economy leading to lesser demand, cheaper imports or increased capacity additions by most of the players leading to excess supply would affect revenues. Also, increase in raw material costs may affect its net profit margins.

However, the company’s focus on sourcing majority of raw material through its farm forestry programme may lessen the impact on margins. The proposed expansion plan may strain financials on account of capital required and interest outgo on loans.

Valuations: At the current price of Rs 43.25, the stock is trading at 3.87 times its FY10E earnings and at 4.09 times its EV/Ebidta. In view of the improving global economic conditions, paper industry is going to benefit from increased demand for paper products.

On account of lower raw material costs and lesser interest burden this year, net profits are expected to go up by 127% in FY10E over FY09.  Although revenues for FY10E would be more or less same as last year, its proposed expansion plans would help JKPL grow revenues from FY11E onwards.  Investors can consider this stock with a long-term perspective.

Disclaimer: The writer does not hold any shares in the company.