One sector that sported a smart recovery from the Covid-impact yet has been under-radar is the Indian paper industry.
The industry which had to face the brunt of offices and schools going virtual for most part of FY21, witnessed a strong recovery in FY22. Of course, the low base of FY21 and the increase in paper prices in 2021, helped the robust performance of paper manufacturers.
The stocks of paper manufacturers had been rallying in the last six months between 12 and 88 per cent and the stock performance mirrors their financial performance. The stock of South-based paper manufacturer West Coast Paper Mills has been the star performer in this space, gaining a whopping 88 per cent in the last six months. Other significant gainers include Andhra Paper (68 per cent), Tamil Nadu Newsprint (60 per cent), Seshasayee Paper (57 per cent), JK Paper (42 per cent) and Satia Industries (38 per cent). However, the stock that has failed to participate in the rally is Century Textiles (11 per cent); possibly on account of its interests in Textiles (25 per cent of revenue) and real estate (4 per cent), besides paper (69 per cent).
What helped the strong performance? Well, the robust performance was driven by three factors. For one, the demand rebound following re-opening of schools and offices has helped both copier market and textbook segment. Thus, higher volumes have helped growth for companies in both these segments – for instance companies such as JK and West Coast have seen their volumes increase by 82 per cent and 90 per cent in the June quarter.
Second, the average realisation per tonne has increased from about ₹55,000-60,000 a tonne levels to ₹80,000 a tonne currently, and this is expected to stabilise at these levels for the next few quarters, unless there is any adverse event.
Finally, demand for packaging boards has been healthy thanks to the strong traction in e-commerce. Also, the recovery in exports, has aided the segment’s growth. This has helped companies such as JK and West coast, which are currently catering to this segment too.
The demand for copier and textbook segment is expected to remain strong over next few quarters. For the copier segment, opening of offices will support growth. Also, the relatively low base of FY22, will help companies sustain healthy growth in FY23. The implementation of national education policy should be the key driver for companies in the Government textbook segment.
The Government has announced phasing out of single use plastic beginning July 2022, and this should help companies such as JK Paper, West coast and Satia Industries which have presence in eco-friendly cutlery segment such as cups etc.
Companies such as JK and West Coast which have presence in the packaging boards segment should continue see sustained growth, with the increasing e-commerce penetration.
While paper manufacturers saw healthy revenue growth in June quarter, the higher power, fuel, and raw material costs, have been a bit of a concern. However, companies in the copier segment such as JK and West Coast have managed to pass on the cost, which is evident from the profit performance in the Q1 of FY23. While the caustic soda and fuel costs (thanks to the softening of global crude oil price) have moderated a bit in the last few months, curbing raw material costs from here, will be critical for sustainability of profits.
On a trailing twelve-month basis, West Coast Paper (8 times) and JK Paper (10.5 times), are trading at a significant discount to the industry average of 15 times. Century Textiles and TN Newsprint are among the expensive stocks in this space trading at 42 times and 19 times their 12-month trailing earnings. Century may not be strictly comparable given its diversified business model with interests in textiles and real estate. The same for Satia Industries was higher at 13 times on account of weak profit performance, despite strong revenue growth.
September 16, 2022