The paper industry’s fortunes are linked to a number of economic indicators, such as literacy rates, spending on education, and sales of fast-moving consumer goods. Most of such indicators show positive momentum, boosting paper stocks, said domestic brokerage firm Nuvama Professional Clients Group in its latest note.
The brokerage points out that the surge in imports of writing and printing grades is likely to continue in Q2 FY24. However, it says that the trend in imports of writing and printing grades beyond Q2 depends on its demand by the educational sector (especially the various state governments) for the upcoming academic year.
It notes that the quantum jump in exports by the Indian industry (which could be one of the factors of short supplies/longer lead times) is likely to reduce due to the falling international prices of finished paper. This will eventually result in the Indian industry catering to more domestic requirements.
There is growing demand from sectors such as FMCG and retail for innovative packaging solutions as they reduce dependency on plastics. Paper stocks can also benefit from the rising e-commerce shopping as well as ready-to-eat and packaged foods.
Capacity addition announcements in the paper industry have been largely visible in the segments associated with packaging paper in the last two years, given the healthy and growing demand for quality packaging of FMCG products, textiles, pharmaceuticals, and e-commerce, said the brokerage.
New Education Policy: To boost revenue in the short to medium term
Since the new curriculum is being developed after a gap of 15 years, it would eliminate the sale of second-hand books and lead to strong growth for at least 2–3 years. Completely replacing second-hand textbooks can be a huge opportunity for paper companies with a higher realisation, as per the brokerage.
Additionally, the ban on single-use plastics is expected to have a positive impact on the paper industry. The prohibition has prompted a substantial shift away from plastics, creating additional demand for paper of approximately 2–3 lakh TPA.
Due to the high capital investment required to set up a new packaging board plant, only a few large players, such as ITC, JK Paper, and West Coast Paper Mills, can capitalise on the opportunity, it added.
Pulp prices rapidly declined from historic peaks
"With the softening of international demand, the quantities available for the Indian markets from China and Indonesia have considerably increased. Furthermore, international pulp prices have moderated considerably, which has aided the drop in prices of finished paper. In this background, we are currently witnessing a surge in imports of wood-free grades in large volumes."
"This trend is likely to continue as there is a slowdown in demand internationally and there seems to be no immediate upward correction in pulp prices. Further, the Indian industry did not make price corrections at the appropriate time, which made the imported wood-free grades attractive for an Indian convertor/market," said Nuvama.
JK Paper has emerged as one of the prominent beneficiaries of the Indian paper industry's consolidation trends over the past decade, according to Nuvama. With a unique position as the sole paper company in India, boasting a pan-India presence and a diverse product portfolio, JK Paper has consistently demonstrated profitability even across challenging business cycles.
The brokerage firm notes JK Paper as a strong candidate for potential re-rating due to its structural improvements in business risk and a robust growth outlook supported by a healthy balance sheet.
In addition, the brokerage also holds an optimistic outlook on West Coast Paper Mills based on the company's solid market position and its subsidiary, Andhra Paper, in the domestic writing and printing paper (PWP) industry.
The company has an integrated manufacturing setup with adequate in-house manufacturing capacity for pulp and captive power plants. With the capacity expansion of optical fibre cable at the new site in Hyderabad and the backward integration of the optical fibre plant, WCPM is geared up to capitalise on upcoming business opportunities, the brokerage highlighted.
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