JK Paper, Orient Paper & other paper stocks have run-up sharply this quarter; can you still bet on them?

Some of the paper stocks have witnessed a sharp rally in June, with some counters including JK Paper, Orient Paper and Pudamjee Papers gaining as much as 66 per cent, 28.5 per cent and 128 per cent in the last six months, respectively. This is despite the paper industry in the country facing headwinds from increased imports from the ASEAN countries, thus creating a situation of oversupply in the market, noted Shreya Hanchate, Research Analyst at Bonanza Portfolio.

The analyst added that the industry experienced sluggish demand during H2FY24, hit by China dumping, higher pulp prices and higher input costs (mainly Wood and Coal). The pulp prices have increased by 30 per cent on-year to $750. 

Paper companies Q4FY24 financials 

The previous quarter was a challenging one for the stocks within the industry, generating a mixed bag of results. Major Paper stocks exhibited subdued numbers due to a decline in Sales turnover and margins hit by a sharp drop in realizations and high input costs. Companies like ITC / JK Paper / West Coast Paper reported a sharp decline in margins by 600bps / 700bps / 210bps respectively, added Hanchate.

GST reduction on paper boxes

The government in its 53rd GST Council meeting has brought a sigh of relief after slashing the 
GST on boxes made of paper from earlier 18 per cent to 12 cent. This move will result in the total cost of packaging material to reduce, benefiting both the companies as well as the consumers. 

Outlook for paper stocks

Going forward, the input prices are expected to moderate, thus easing some pressure off the margins. The demand conditions are expected to remain sluggish until the surplus capacity from other countries is not exhausted, pointed out Hanchate.

Suman Bannerjee, CIO, Hedonova on a positive note said the sector's outlook remains positive,  driven by sustainability trends favoring paper over plastic and a gradual recovery in demand for traditional paper products as economies reopen. However, challenges persist with rising input costs and evolving environmental regulations. 

Should investors buy into paper stocks after a sharp upmove?

Aamar Deo Singh, Sr. Vice President, Research, Angel One remarked that  few of the paper stocks are trading at record highs whereas the rest appear to have made a top. Overall, the paper industry stocks have a median P/E of 9, indicating low investor interest in this sector.  At current levels, investors are advised to stay away from fresh entry, as the run-up has been quite sharp.

On the contrary,  Bannerjee said Investors should focus on companies excelling in the packaging segment and effectively managing costs while exercising caution with firms heavily reliant on traditional paper products.

Similarly, Atul Parakh, CEO of Bigul advised that investors should consider companies with strong fundamentals and adaptable business models. Selective investments may be worthwhile, but caution is advised due to potential margin pressures and regulatory changes.

Meanwhile, Hanchate is bullish on West Coast Paper and JK Paper considering the below:

West Coast Paper Mills Ltd.: West Coast is the 5th largest paper manufacturer in India, with a consolidated capacity of 568,000 MTPA and has a strong market position in most segments. The company also plans to
expand into Optic Fibre Cables segment by setting up a plant in Hyderabad with an estimated capex of Rs. 175 crore and is expected to generate a revenue of Rs. 275 crore.

JK Paper Ltd.: Despite facing severe headwinds on net sales realization front, the company pulled off the quarter led by higher sales volume. The management has guided for healthy double-digit growth for the
coming year. The company generates healthy Free Cash Flows and plans to expand through inorganic acquisitions