Incorporated in 1960, JK Paper Ltd is engaged in the manufacture and sale of branded papers and packaging boards. With the tailwinds behind the Indian Paper Industry, I will try to explain the factors favoring the industry leader. I will be covering the details in the blog “JK Paper Ltd- Analysis”.
JK Paper Ltd(JKPL) is a leader in India’s copier paper segment, the second-largest in the coated paper segment and a leading player in the packaging board segment. The Company is one of the largest wood-based paper manufacturers in India.
JKPL had a capacity of 4,55,000 TPA at the end of FY19. With the acquisition of Sirpur paper mills in Aug 2018, the capacity has expanded to 5,91,000 TPA. The idea behind the acquisition was that a greenfield project takes about 40 months to set up whereas a brownfield one takes about 12 to 18 months. The company doesn’t want to lose out on the robust demand scenario created by supply constraints. The company expects the demand scenario to persist for another 3-5 years with a growth rate of 6-7%.
Indian Paper Industry: Demand-Supply scenario
Indian paper industry was supply constraint between 2001-2010, because of which a lot of new capacities came up in the early 2010s with upgraded technology and higher scales for better profitability. This led to overcapacity and then to industry consolidation, moving the needle in the favor of supply from 2015 onwards. No new capacities have come in the last 4-5 years in the printing & writing segment. And whatever the existing capacity was, has already been absorbed.
The Indian paper industry is classified into four segments – printing and writing, packaging paper and board, specialty papers and newsprint. Packaging paper and board’s share is over 50% of the total Indian paper market, growing at over 8% annually. Some of the paperboard sub-segments such as virgin fiber-based boards and cup stock grew at over 12%. Q4 is the best quarter for the industry and Q1 is the worst(vacation month for schools, colleges, institutions, courses, and other things).
Per capita paper consumption in India stands at 13kg compared to the global average of 57kg. An increase of 1 kg consumption would mean an increase in demand by 1 MnT. The domestic demand for paper and paperboards in India is estimated at 17.1 million tonnes at ₹80,000cr in 2017-18, growing at a CAGR of 6.5%(fastest in the world). Growth of the paper industry moves in tandem with GDP growth.
Indian manufacturing, in general, is uncompetitive compared to global peers due to quite a number of factors such as regulatory bottlenecks, poor infrastructure, higher fuel costs, technology obsolesce, lack of scale, etc. So, there always remains a threat of cheaper imports. Under Free trade agreement(FTA) with ASEAN, Japan, and South Korea, where the better quality paper is available at $40/T compared to $100-$110/T in India. Imports of paper and paperboard increased from ~0.5 million tonnes in 2010-11 to ~1.7 million tonnes in 2017-18 growing at a CAGR of ~20%.
To protect the interest of domestic players, govt on Dec 5th, 2018, imposed anti-dumping duty on uncoated copier paper imported from Indonesia, Thailand, and Singapore for a period of 3 years. However, the request for Anti-dumping duty on coated paper was rejected.
JK Paper Ltd- Analysis : Raw materials
Coming to the raw material, there are 3 kind of raw material used in the industry, wood pulp, agri waste or waste paper. JKPL mainly uses wood pulp. India traditionally lacks the supply of quality pulp due to scarce forest resources. Importing it is costlier along with the currency risk. With the current dynamics such as change in policies in China and EU, pulp prices has gone up significantly.
In addition, unlike other countries, the Indian govt does not allow industrial plantation. The other option was to encourage farmers to do plantation which was a long gestation farming, as well as farmers, had to let go of other cash crops. To overcome that JKPL team had to convince and give buyback assurance to these farmers. Initially, the company had to procure wood from an average distance of 882km. For 2018-19, the majority of procurement is done from a radius of 200km and 96% of pulp requirement is met through these plantations. This lead to drop in raw material and logistics cost. Almost all companies that manufacture paper from wood have been promoting farm forestry. According to a recent article, farmer’s net income out of eucalyptus wood cultivation is estimated to be 60-70% more than cropping other cash crops.
JKP sources 100% hardwood pulp from the domestic market for its Printing & Writing segment and imports 65% softwood pulp for the packaging segment due to its limited availability in India.
The company has well managed on the costs side, in terms of demand-supply scenario the outlook remains positive for the next few years.
JK Paper Ltd- Analysis: Plants & Products
The company has 2 plants, one in Rayagada(Odisha) & the other one in Songadh(Gujarat). Since the company is not able to fulfill all the demand with the current capacities(operating at a capacity utilization of 108.7% in FY19), the company outsources manufacturing which contributes about 10% of revenue.
JK Paper Mills(JKPM)– Located in Rayagada(Odisha) was commissioned in 1962 as an integrated pulp and paper plant. The capacity has increased from 18,000 TPA to start with which now stands as 2,95,000 TPA .
Current capacity: 2,95,000 TPA
Manufactures: copier, coated and maplitho paper
In 2013, the company invested Rs. 1,775 Cr. in capacity expansion at Unit JKPM.
Central Pulp Mills(CPM)– Located in Songadh, Gujarat. The plant was acquired by JK Paper Ltd in 1992-93.
Current capacity: 1,60,000 TPA
Manufactures: packaging board, copier, maplitho and a variety of specialty papers.
JK Paper Ltd is currently the market leader in the copier paper segment and among the top two in India’s coated paper and packaging board segments. A lot of products in B2C segment, thus having some pricing power. But more or less, pricing is derived by market demand-supply scenario.
1. Copier & Paper Segment: Used in Printing & Photocopying.
Brands: (JK Copier & JK Easy copier: High-end customers) (JK Sparkle: Middle segment)
(JK Copier Plus: Govt & PSU) (JK Cedar: High-end Digital printing) (JK C Max & JK Max- Value for money). Contributes 50% to revenue and has a 23% market share in India.
2. Coated Paper: JK Cote. Used in publishing & magazine. JKPL has a market share of 16% in maplitho papers. Faces threat from imports from ASEAN & China. 25% of revenue is split between coated and maplitho papers.
3. Packaging board: JK Ultima & JK Tuffcote
Used in FMCG, Pharma & food processing industry. It depends on economic growth. The packaging board contributes around 25% to revenue with a market share of 11%.
4. Corrugated board
5. Maplitho Paper: 25% of revenue is split between coated and maplitho papers.
JK Paper Ltd- Analysis: Bringing operational efficiency
JK Paper Ltd- Analysis: Financial Analysis
Because of the operational efficiency achieved as shown in Fig 1, the margins have improved.
For Q1FY20, the EBITDA margin stood at 35%. Given the Anti-dumping duty imposed on copier paper, the management of JK Paper is quite confident of maintaining the margins as well as they are quite efficient in terms of managing the costs.
Paper industry is highly capital intensive and requires regular capital expenditure.
JK Paper Ltd- Analysis : Subsidiaries
JK Paper Ltd(20%) had set up a JV agreement with Oji Holdings Corporation(60%) and Marubeni Corporation of Japan(20%) for setting up a modern manufacturing facility for Corrugated Packaging. On Dec 22, 2016, the company decided to get out of this JV by selling its stake to Oji. The reason is not known.
JK Paper Ltd along with its subsidiaries JK Enviro Tech limited acquired distressed ‘Sirpur Paper mills ltd’ in August 2018 at a consideration of ₹371 crores with ₹400 cr of investment to expand the capacities in 2 phases. Sirpur is expected to break even by Jan 202o.
JK Paper Ltd- Analysis : Equity structure
Promoter shareholding has been continuously decreasing due to the conversion of FCCB to equity shares. Regular equity dilution is never positive for market participants.
No shareholding is pledged.
JK Paper Ltd- Analysis: R&D
Despite being a company in a commoditized sector, JK Paper Ltd spends consistently in R&D about a sum of ₹4 cr per annum. That goes:
1. Towards improving product quality
2. Towards higher pulp yield
3. Towards reducing the maturing age of eucalyptus- Usually, it takes about 4 years for a eucalyptus tree to mature. The company through its R&D efforts has brought down to 2.5 to 3 years.
JK Paper Ltd- Analysis: Valuation
Since, the Indian paper sector is a cyclical & commodity one, the valuations are lower. As on 9th Oct 2019, the Price to Earnings ratio stands at just 4.24, market cap to sales at 0.6x. But the favourable industry scenario is likely to play out once the share market scenario changes.
Commodity stocks usually perform towards the end of the bull market and that too the returns are quite phenomenal in that short period of time.
JK Paper Ltd- Analysis: Key data points to track the industry
1. Demand- Supply scenario- Tracking new capacities as well as imports coming in
2. Pulp prices
3. Coal prices
4. If the company has captive pulp resources
Indian Paper Sector: Expansion
JK Paper Ltd- Analysis: My opinion
Because of the demand-supply mismatch in favor of supply, a lot of companies have announced capital expenditure. Even JK Paper Ltd has announced the latest expansion plan of ₹2100 cr on Sept 17th, 2019. As soon as these new capacity starts coming up, there will be oversupply leading to lower capacity utilization and companies getting into distress. Other than these mega expansions, there are other debottlenecking, small brownfield expansions, etc.
Give that the expansion planning is in the early stages and it will take 3-4 years for these to come into play, it is likely to create an oversupply post that. As of now, if there are no external disturbances, the sector is likely to perform well.