Earnings Boost For Paper Stocks

Shares of papermakers have surged in the last one week as a pick-up in demand, lower input costs and high prices boosted their earnings.

Revenue of most paper makers that have reported results so far rose in double-digits and operating margins rose. The two exceptions were ITC Ltd.'s paper and paperboards segment and the financially beleaguered Ballarpur Industries Ltd.

Besides a surge in demand in one of the fastest growing markets for paper products in the world, a drop in paper imports in India created an opportunity for domestic companies to sell more, AS Mehta, president at JK Paper Ltd., said. The quarter, according to Mehta, was aided by a rise in prices by 4 to 5 percent.

Newsprint prices surged due to lower production in China, according to a research report by Prabhudas Lilladhar. Ban in low-grade imports resulted in China consuming most of the dumping by Russia and Europe, the brokerage said. That created a short supply to other countries such as India, which depends on imports for about 50 percent of its consumption.

Larger turnovers led to improved margins as fixed costs remained stable, according to Mehta. Sourcing wood locally led to cheaper pulp and lower logistics costs, Prabhudas Lilladhar said. This brought input costs lower by 7-9 percent for the quarter, aiding profitability, the brokerage said.

Playing Catch-Up

Most paper companies' share currently trade at 12-month trailing price to earnings ratio of less than 16 times. That's a steep discount to multiple for NSE Nifty 500 Index's 26 times.