30

Company Background

JK Paper Ltd (JKP), a member of HS Singhania Group is one of India’s largest paper companies which was established in 1962. The Company is a part of the prominent JK Organisation, which is over 100 years old and one of the leading business conglomerates of India. JKP is the market leader in Branded Copier Paper in India and amongst the top two players of Coated Paper and high-end Packaging Boards in the Country.

Investment Rationale

The Company has state-of-the-art integrated manufacturing facility units - JK Paper Mills (JKPM), Rayagada, Odisha and Central Pulp Mills (CPM), Songadh, Gujarat with a combined capacity of 4.55 Lakh TPA. These plants delivered an average capacity utilisation of 108.7% during FY18-19. In 2018-19 JKP acquired Sirpur Paper Mills, Telangana aggregating its capacity to 5.91 Lakh tonnes.

JKP has diverse product portfolio with Unit JKPM manufactures copier, coated and maplitho paper varieties; Unit CPM, manufactures packaging board, copier, maplitho and a variety of specialty papers.

The Company’s products are sold through pan-India distribution network of 229 trade partners, 18 depots & 4 regional marketing offices, and covering nearly 4000 dealers. JKP exports products to around 62 countries including the US, the UK, Sri Lanka, Bangladesh, Singapore, Malaysia, Africa and Middle East.

JKP has been continuously focusing on its plantation activities and has covered about 160,000 hectares cumulatively within a radius of 200 Km of its manufacturing plants for farming. The Company helps in planting Eucalyptus, Casurina and Subabul clones/saplings. This has not only resulted in greening nearby areas but also ensures adequate availability of raw materials at affordable costs, benefitting around 5,000 farmers and thus making the Company wood and carbon positive. It plants more trees than it harvests for paper manufacturing.

JK Paper is working towards increasing its paper production capacity to 8 Lakh TPA by next year with an outlay of about Rs. 2,100 crore. The expansion at the Gujarat plant is in process and will come up over next financial year while Sirpur Paper Mills is expected to be progressive by third quarter of the current fiscal year.

For the period of FY16-19, its topline and bottomline grew at a CAGR of 10% and 97% respectively. In Q1FY20 JKP posted its highest ever quarterly EBITDA, PBT and PAT. Consolidated profit for Q1FY20 was higher by 34% at Rs. 127 crore and operating profit increased by 24% to Rs. 256 crore even after net sales decreased because of lower input costs, better operating parameters and higher realizations coupled with enriched product mix.

The Company has been paying its debt and has deleveraged its Balance Sheet substantially in the last few quarters. This coupled with strong operating performance has resulted in rating upgrades.

As a part of Prime Minister Narendra Modi's efforts to curb pollution, India is likely to impose a nationwide ban on single-use plastics which could give an impetus to the paper industry. Moreover, paper demand is likely to remain buoyant due to increased demand from the FMCG and packaged food segment as well as rapidly growing e-commerce.

Recommendation – JKP’s strong market position, presence in high quality paper segments, established brand name, integrated production capacities, sourcing more than 80% of its wood requirements from captive farm forestry, adequate water supply and self-sufficiency in power augurs well for the company and will help the company to gain market share and improve margins. Further, its focus on value added products, increasing farm forestry, ramping up of Sirpur unit and capacity expansion will boost the earnings. At the CMP of Rs. 133.25, the stock trades at 4 times FY21 EPS of Rs. 35. Hence, we recommend a BUY on the stock with a Target Price of Rs. 175 with an upside potential of 30% from the current level with an investment horizon of 9-12 months.