The year 2023 has not been great for paper stock JK Paper. The stock has shed over 10 percent in 2023 so far. But in the long-term, the stock has shone like a diamond. In the last 3 years, the stock has gained 388 percent.
From its COVID low of ₹62, the stock is now trading 494 percent higher at around ₹368.
Meanwhile, in the last 10 years, the stock has skyrocketed over 1089 percent from around ₹31 in March 2013 to the current level. So in the grand scheme of things, the recent 10 percent fall in JK Paper does not seem major.
In the last 1 year, the stock is up 22 percent. Meanwhile, it has lost over 5 percent both in March 2023 (so far) as well as in February. It was flat in January.
The recent correction in the stock was seen despite its robust performance in the December quarter of FY23 (Q3FY23).
Earnings and Acquisitions
In Q3FY23, the company's profit more than doubled to ₹329 crore on the back of higher demand for paper products from schools and offices post-pandemic. The firm reported a profit of ₹150 crore in the year-ago period. Meanwhile, its overall revenue from operations jumped nearly 61 percent to ₹1,643 crore, with the majority from its paper and board business. Revenue from its paper and board business surged 59.6 percent to ₹1,633 crore in the quarter.
"Higher capacity utilization and growth in sales volume across all segments helped the company to improve its market share and deliver better performance," Harsh Pati Singhania, vice chairman and managing director at JK Paper, said in an exchange filing.
JK Paper has also been expanding its business through acquisitions. In November last year, the company announced its purchase of an 85 percent stake each in Horizon Packs and Securipax Packaging for ₹578 crore. The firm also announced that it will acquire the remaining 15 percent of these 2 firms within the next three years.
"HPPL and SPPL both manufacture corrugated packaging and have seven manufacturing plants across India. The acquisition will bolster the product portfolio of JKPL, as they entered the corrugated packaging business," CRISIL said in its report.
During fiscal 2022, HPPL and SPPL had consolidated revenue of ₹832 crore and an operating margin of 12 percent. Their consolidated debt stood at ₹94 crore and liquidity at ₹8 crore as on March 31, 2022, and consolidated debt will further reduce by December 2022, it added.
The strong market position of JK Paper in the writing and printing paper industry, its established position in the copier segment, its superior market reach and dealer network, strong operating efficiency and robust financial risk profile are some key positives for the stock.
Brokerage view
Recently, brokerage house Haitong retained its positive view on the stock despite the recent correction with a target price of ₹600, indicating an upside of nearly 63 percent.
"We maintain our positive view on JK Paper as we see strong growth visibility for the company over the medium term due to a healthy balance sheet. JK Paper's net debt has slightly gone up from ₹1,660 crore in Sept 2022 to ₹1800 crore in Dec 2022 even after the acquisition of an 85 percent stake in two corrugated packaging companies. Going ahead, we believe JKP might become debt free over the next 4-6 quarters, which would help the company to undertake large capex over the next 1 year," said the brokerage.
Furthermore, JK Paper's stock trades at an attractive valuation (at 3.9x on FY24 EV/EBITDA vs a historical average of 5.3x), despite an improvement in its business risk profile (due to rising share of growing packaging segment revenue from 20 percent in FY22 to 50 percent in FY25), it added.
It estimates JK Paper's revenue, EBITDA, and PAT to grow at 41 percent, 79 percent, and 107 percent YoY to ₹1,890 crore, ₹600 crore and ₹350 crore, respectively in Q4FY23.
Sector outlook
The brokerage noted that Chinese Bleached Hardwood Kraft Pulp (BHKP) prices fell sharply by 15 percent to $728/t at present over the past 3 months and are expected to decline to around $600/t in CY23 due to weakening global demand for pulp and paper.
During falling global pulp prices in the previous cycle (from $760/t in Q4FY18 to $457/t in Q3FY20), the brokerage said that it observed that JK Paper's average realization remained firm around ₹60/kg due to tight demand-supply fundamental in the domestic market (as most mills operated at almost full capacity) and a weak rupee.
Going ahead, Haitong believes that the India paper industry dynamics will remain favorable due to the limited capacity addition plan over the next two years vis-à-vis rising demand for packaging paper (from FMCG/food, etc) and uncoated paper (due to implementation of NEP policy). This might help domestic paper prices to remain relatively stable, however, the brokerage has conservatively assumed JK Paper's realization to fall from ₹85/kg in Q3FY23 to ₹75/kg by Q3FY24 for projection purposes.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
