Why Indian Paper Stocks Are Closing In On 52-Week Highs

Shares of paper companies have rebounded in the last two months as demand and prices of the commodity rose globally.Momentum started building up after April and paper stocks are closing in on 52-week highs. They have logged gains of 4-40% in the past month alone compared with a 1% rise in the benchmark Nifty 50.The pandemic had disrupted demand as the supply chain froze because of restrictions globally. Recovery began in the January-March quarter with China importing kraft paper from India. That, along with a shortage of shipping containers, pushed pulp prices higher. The second wave of Covid-19 didn't disrupt business as much as feared and players like JK Paper Ltd., India's largest private paper producer, now operate at full capacity..Rising PricesMost paper companies, and non-integrated players in particular, increased prices in early January. That came as the benchmark pulp contract rebounded in the quarter ended March to its highest in about a year following the sudden surge seen in global prices.RecoveryDemand for paper had tumbled after March 2020 as schools and colleges switched to online classes and companies allowed work from home during the pandemic. But the industry has been trying to diversify portfolio to maplitho (used in invoices), copier, cupstock (packaging) and specialty paper (designed for specific uses).West Coast Paper Ltd., having recently acquired Andhra Paper Ltd., has been increasing the proportion of value-added niche products in its portfolio for the last two-to-three years, according to its presentation.Specialty paper not only commands higher realisations but also faces lower import threat, while cupstock is a growth segment aided by the plastic ban in various states, the company said.The Indian paper industry operates in four key segments: printing and writing, packaging paper and board, specialty papers, and newsprint. According to data cited in West Coast Paper’s annual report, while the share of printing and writing has remained stable at around 30%, packaging has inched up from from 46% in FY08 to 52% in FY20.Consumer industries and e-commerce has pushed up demand for packaging board, said Amar Mehta, president at JK Paper. That has caused the prices to rise by 3-4%.Mehta also expects recovery in office paper demand by July as workplaces gradually open up, he said. And traction is building up for coated and specialty paper. He expects consumption at 80-85% of normal levels by the end of July.Cushion Of Pre-Covid GrowthOperating income of top paper companies improved in two to three years before the pandemic, according to data provided by India Ratings & Research Ltd. The sector’s Ebitda margin rose to more than 20% in FY19-20 from under 12% in FY15. That helped them pare debt and provided a cushion when demand tumbled as Covid-19 spread.While the operating income shrunk by almost half in FY21, they didn’t face liquidity issues and the interest coverage ratio remained close to 3 times, said Khushbu Lakhotia, associate director at India Ratings & Research. A recovery over the next year and a half would help the sector’s net leverage—a measure of borrowing capacity—rise 20-30% in FY22, Lakhotia said.India Ratings expects paper demand to grow in low teens in FY22. Lakhotia said operating margins are likely to recover in FY22 on higher volumes but will remain “reasonably lower than” the FY20 level of 20% because of increased raw material costs and lower realisations..Note: Companies included: JK Paper, West Coast Paper Mills, Andhra Paper, Tamil Nadu Newsprint, Seshasayee Paper, NR Agarwal Industries, Emami Paper Mills, Satia Industries, Orient Paper, Kuantum Paper and Ruchira Paper

Why Indian Paper Stocks Are Closing In On 52-Week Highs

Shares of paper companies have rebounded in the last two months as demand and prices of the commodity rose globally.

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