Why are paper stocks like JK Paper, Andhra Paper, rising? Let's analyse

Paper manufacturers have gained up to a fourth of their value in the last five trading sessions. Analysts say this is because of higher prices and improving demand.

Share prices of the top five paper companies in India by market capitalization – JK Paper, West Coast Paper, Andhra Paper, Seshasayee Paper, and Tamilnadu Newsprint – have gained in the range of 18 per cent-24 per cent, in the last five days.

The demand for paper is expected to improve as educational institutes, offices, courts, and other organisations slowly come out of COVID lockdowns. Demand for paper had taken a hit as lockdowns meant all offices and schools, etc, wenet digital i.e. no use for physical paper. This also led to lower collection of waste paper - a key raw material in producing recycled paper.

European Union, too, banned the export of waste paper in October 2021.

Both the factors led to a rise in prices of waste paper which forced recycled paper manufacturers to take a price hike.

Types of paper

There are two types of paper – recycled and mills’ paper. Recycled is made out of waste paper, while mills’ paper is made out of the wood pulp. Generally, prices of mills’ paper trade are at a premium to recycled paper.

However, because of the above-mentioned reason, for the first time in 40 years, the prices of recycled papers surged above mills’ paper, according to Centrum Broking.

Because of this anomaly, manufacturers of mills’ paper also undertook price hikes, to keep the prices at a premium to that of recycled papers, said the note. Thus, the selling prices of papers increased for the overall industry.

The brokerage expects JK Paper, West Coast Paper, and Andhra Paper – mills’ paper manufacturer – to benefit more compared to other players as they have been able to take a price hike despite a lower rise in raw material cost.

JK Paper

Shares of JK Paper hit a new high of ₹288, up 4 per cent on the BSE in Tuesday’s intra-day trade, gaining as much as 29 per cent in the past one week on improved business outlook.

In comparison, the S&P BSE Sensex was up 6 per cent during the same period. The stock surpassed its previous high ₹284.80 touched on August 9, 2021.

The company on January 14, 2022 had intimated the stock exchanges of commencement of commercial production from its new packaging board plant at its Unit CPM, Gujarat, w.e.f. that day i.e., January 14, 2022.

In the past three months, the stock has outperformed the market by surging 35 per cent as compared to a 2.3 per cent decline on the S&P BSE Sensex.

For the October-December quarter (Q3FY22), JK Paper reported 134 per cent year-on-year (YoY) growth in profit after tax at ₹151 crore on the back of 35 per cent YoY jump in turnover of ₹1,094 crore.

The management had said that the improvement in the company's performance was due to recovery in the paper segment and growth in production and sales volume coupled with higher realisation. This was despite a sharp increase in major input costs in the recent period.

"The outlook for the paper sector is optimistic in India on account of the intrinsic use of paper in education in India, based on which the market for writing and printing paper in India is expected to grow around 4 per cent per annum, higher than the global average," JK Paper said in FY21 annual report.

The market for packaging board is likely to grow at 9 per cent to 10 per cent annually in India, compared to around 4 per cent around the world. This growth is catalysed by personal consumption and the growing substitution of plastic products, the company said.