JK Paper Archives

Had you invested Rs 10,000 in JK Paper stock a year back in July 2020, your investment would have become Rs 21,400, nearly doubled in a year. JK Paper has returned 114% in a year as of July 2021. Last day we talked about the paper industry as a whole, today let’s talk about one of its largest players. A unique company that sells only one thing, paper. Let us explore JK Paper’s business model and its financial performance.

About The Company

Established in 1960, JK Paper is a part of the legacy JK Group. The company is India’s largest producer of branded papers and a leading player in Coated Papers and High-end Packaging Boards. Although the company has a nationwide distribution network, it operates out of 3 major factories, each based in Gujarat, Odisha, and Telangana respectively. The company also boasts healthy export volumes as compared to its peers and has an international presence in almost 62 countries.

JK Group is a conglomerate run by the Singhania Family, established by Lala Kamlapat Singhania in the late 1800s. The Singhanias are a BIG family of industrialists with their legacy spread across a century. JK Tyre, JK Cement, JK Lakshmi Cement, JK Jaykay Enterprises, even Raymond are some of the big names that are part of the JK Group.

Business Model

JK Paper makes any and every type of paper. It produces printing, glossy, coated papers to newsprint, packaging, and tissue papers. Apart from producing paper, it also produces paper pulp which it supplies to other companies and also exports it. According to the company’s investor presentation, there are majorly three product segments. Based on production volume for Financial Year 2020-21, The company majorly deals in:

Coated Paper(~12% of production volume)
Uncoated Paper(~68% of production volume)
Virgin Fibre Board(~20% of production volume)

The Annual Report for FY 2019-20 states that the company majorly has for production segments-

Office and Copier Paper(Uncoated Paper) – Copier papers find their application in printers, fax machines, and photocopiers. This is the most produced segment in terms of volume of all other segments.
Packaging Boards– Mostly used for FMCG, food & beverage, e-commerce delivery boxes, pharmaceutical, and textile sectors
Coated Papers– JK Paper is one of only two Indian companies manufacturing coated papers. Coated papers are used in magazines, books, brochures, posters, and wedding cards.
Maplitho and Speciality Papers– Find application in MICR cheque paper, parchment, ledger, and bond varieties

The company has three major factories where it produces most of its products. They are:

JK Paper Mills(JKPM) in Rayagada, Odisha, with an installed capacity of 2,95,000 tons per annum. It is among the largest paper manufacturing facilities in the country and produces mostly both coated and uncoated paper.

Central Pulp Mills(CPM) in Songadh, Gujarat, with an installed capacity of 1,60,000 tons per annum and is specialized in the manufacture of paper and packaging boards.

Sirpur Paper Mills(SPM) (owned through its subsidiary) in Kagaznagar, Telangana, with an installed capacity of 1,36,000 tons per annum. JK Paper acquired Sirpur Paper Mills in 2018 because of the abundance of wood in Telangana and Andhra Pradesh close to the manufacturing facility. This facility is known to produce quality colored and coated paper.

JK Paper has a robust distribution network of over 300 trade partners and 4000 dealers with 15 pan-India depots, reducing the turnaround time in servicing customers. Being the largest player in the paper sector in India, a good distribution network can be a competitive advantage.

How Are The Finances Of JK Paper?

.	March-21	Dec-2021	March-20
Revenue	935.1	770.5	766.6
Profit	135.8	65.9	92.7

All Amount In Rupees Crores

JK Paper is a financially healthy company, yet with very low-profit margins. The paper-making business is a capital-intensive and labor-intensive task. You can clearly notice the high difference between revenue and net profits, it is the cost that is eating into the profits. At the same time, JK Paper is not able to realize a better price because of the availability of imported paper that is relatively cheaper. The government has not imposed the right import duties to protect the domestic paper market. China plays a key role in the impact on the paper industry.

One can notice that the company was performing well till 2013, but faced potholes in 2014 and 2015, this was because the company was undergoing expansion and acquiring various assets which made costs eat up into profits. However, the company sharply recovered after the downturn and is now profitable. JK Paper has seen a consistent rise in profits from the past three quarters.

The company’s Return On Equity(RoE)% has steadily increased and moved parallel to the company’s profits. It has also managed to use its capital efficiently, which we come to know through its increasing RoCE or Return On Capital Employed. Return on Assets or ROA has also improved over the years. The company is financially healthy but has a LOT more potential provided the COVID-19 subsides, and the company manages to cut its costs.

Expenses are more than ~70% of the total revenue. ~50% of total expenses the company makes is for raw materials like hardwood and bamboo, pulp, chemicals, and packaging materials. Employee Benefit Expenses and Power/Fuel/Water Expenses are the other two major expenses that the company occurs.

Coming to the Debt aspect of the company. The company has managed to utilize its debt in an efficient manner. This is evident from the graph given below. The Debt-Equity ratio indicates how much leverage the company is using to operate its business. Lower debt would mean less risk for equity shareholders. The company however onboarded significant debt in 2021 to tackle and kickstart business post-COVID.

The stock price of JK Paper has seen a significant rise over the past year. As of July 2021, over a period of one year, the company returned more than ~120%, over 6 months the company returned close to ~100%.

What Lies Ahead?

Speaking of the present, the factories of JK Paper are not operating at full capacity. Material costs are high and digitalization is replacing the use of paper. From legal documents to college notes all have been digitized. Could this be a threat to the sector as a whole? Maybe not. Paper need not be the evil for the environment as it is propagated to be. The use of paper will not diminish for at least a century. When COVID-19 subsides, offices, schools, and colleges will switch back to paper. Paper will still be used for other industrial purposes such as the packaging of FMCG goods, food and beverages, advertising, and more.

JK Paper has beaten other companies such as Tamil Nadu Newsprint and Century Textiles & Industries Ltd. to the race in expansion over the years. It is a company with a turn-around potential looking at the past record. The triggers one can watch out for are the international pulp prices, import/export duties imposed on paper, regulation of paper and pulp industry in China(the largest paper producing country), and obviously, lifting of restrictions on corporates and schools.

A burger wrapped in paper to currency notes, gift wraps, and even your e-commerce delivery package. All of them have one thing in common, Pulp and Paper. We might not realize it but the Pulp and Paper Industry plays a huge role in our lives. So it is a sector worthy of being looked into.

As we progress towards sustainable living, we are cutting down on the use of plastics and synthetics and increasing the role of paper in our lives. Paper as a commodity is unique in the sense that it is recyclable, it can be used over and over for quite some time. We might not notice it but there are big changes being made in the paper industry in terms of sustainability, profitability, and innovation.

From a finance perspective, the Pulp and Paper industry has pretty much been “sidelined” by analysts and brokers. We notice that research and advisory firms do not give weightage to the industry as much as others industries. Pulp and Paper stocks have given quite some returns in the past few years. These stocks are definitely worth checking out. In this piece, we discuss the Pulp and Paper sector in India and around the world. We also discuss what drives the Pulp and Paper market and the future of the industry.

The Setup

According to Indian Paper Manufacturers Association, the Indian paper industry accounts for about 5% of the world’s production of paper. The estimated turnover of the industry is Rs 70,000 crore (domestic market size of Rs 80,000 crores) and its contribution to the exchequer is around Rs 5,000 crore. The industry provides direct employment to 5 lakh persons, and indirectly to around 15 lakh persons. The Indian paper industry is expected to grow by anywhere between 5-6% CAGR between 2021 to 2024.

Paper is manufactured from mainly three products:

Wood
Recycled Paper
Agro-Residue.

Paper production is capital-intensive, energy-intensive as well as water-intensive in nature. Paper is made from pulp. The pulp can come from wood, recycled paper, sugarcane, jute, straws, etc. The majority of the industry relies on the recycled and agro-residue-based raw materials instead of wood. This not only proves cost-effective but is also environmentally friendly. Close to ~75% of the paper produced comes from recycled fibre and agro-residues-based raw materials, remaining ~25% comes from the wood-based pulp.

According to CARE Ratings, “Packaging grade paper accounts for the highest share of about 54% followed by printing & writing, newsprint, and speciality paper with a share of around 35%, 7%, and 4%, respectively, in the domestic paper industry demand”.

In India, imports of paper and paper products slashed by nearly ~40% in 2020. Yet exports rose, mainly to China. China does not recycle all of its paper domestically and has banned the import of old corrugated cartons and waste paper stating pollution curbs. It, therefore, imported finished kraft paper and recycled pulp from India.

Paper Industry During COVID-19

After the first lockdown was announced in March 2020, paper production was halted completely for quite some time. Paper stocks saw losses in corresponding quarterly results. Jobs were lost and the dynamics of the industry became haywire. According to CARE Reports, sales dipped by close to 48.9% YoY during the June 2020 quarter.

During the first COVID-19 wave, newspaper distribution was nearly shut, paper production was at a halt. Demand for paper decreased as the world started working from home. Now, the majority of the paper industry relies on recycled paper. This was a bit of a concern during the first lockdown.

One produces new paper from pulp which is obtained from waste paper. The problem here was that there wasn’t enough ‘waste’ paper being produced in the market. Waste paper over here is an essential material used to produce new paper products. India actually doesn’t even generate sufficient waste, such that it actually imports 70% of the total waste paper used in the production of pulp from Europe and the US. This points out to another important statistic that India’s per capita consumption of paper is merely 15 kg as compared to the global average of 57 kgs and the US average of 200 kg.

As literacy improves and India makes its shift from plastics to paper, one can see a huge potential for an increase in per capita consumption of paper. The difference between India’s per capita consumption and global average per capita consumption is the huge potential that the paper industry sees.

Pulp and Paper On Dalal Street

Fun fact, ITC is the largest producer of paper/paperboard/pulp in terms of volume and revenue generation. However, from an investor’s perspective, we cannot consider it to be a paper stock. Accordingly, JK Paper has the highest market cap and also one of the strongest players in the segment. In the table given above, we see 5 stocks with the highest market capitalization and the returns they provided in 1 year. As of June 2021, JK Paper returned 100.3%. West Coat Paper 45.80%, Tamil Nadu Newsprint, and Papers returned 49.9 while Seshasayee Paper and Emami Paper returned 16.8% and 89% respectively.

That makes us ask. What impacts Paper stocks? One major factor that has impacted paper stocks is the anticipated ban on single-use plastic. Every once in a while we see that government starts taking strict action against the use of single-use plastic bags. One can clearly see a spike in paper share prices in August 2018, September 2019, and April-May 2021. Another factor that affects paper stocks is the cost of raw materials. Coal price can be an important factor since paper production is a power-intensive industry. An increase in the cost of power or electricity can impact profits that would eventually reflect on the markets. Other factors such as global pulp prices, raw wood, etc.

According to the latest report on paper and paper products by CARE Ratings, the paper industry did recover sharply by December 2020. Production resumed to normal and almost all of the top 5 companies by market capitalization reported a sharp increase in profit margins.

The Future

ITC and Century Textile and Industries are two conglomerates that are involved in making paper these give a REALLY strong competition to the companies that make just paper. The weakness that paper companies face is a lack of diversification, poor trade policy and international competetion

Imported paper is cheaper than domestically manufactured paper. The imported paper isn’t sufficiently taxed while export duties are imposed on domestic companies. As for paper, whatever happens in China has a great impact on paper stocks. China imports ready made pulp from India to curb pollution in their own country and exports ready-made paper to India at the same time. There might an urgent need for reforms in the paper industry.

The demand for writing papers is expected to remain dampened unless academic institutions open up. Since it is these institutions that hugely contribute to the demand for writing papers. Another factor adding to the recovery of the industry could be newsprint circulation that would eventually fuel paper demand. Additionally, FMCG goods too are slowly switching to more environmentally friendly paper-based packaging. Broadly stating, as the global economy recovers and paper production goes back to normal, one can expect a healthy performance by the industry in Q2FY22.