Indian Paper Companies: Are they worth buying now?

Background

Paper stocks have suddenly come into focus after a lackluster performance for many years. A recent listing(end of 2017) of the company ‘Astron Paper’ saw a mega debut with a listing premium of 130% [2].

The situation of these companies was pretty bad just 5 years back. The table gives a brief highlight into the debt-ridden scenario of many top performing paper companies[4].

Debt Ridden Paper Companies

Table 1. Heavily leveraged  paper companies in 2013[4]

What is the reason behind the sudden reversal of fortune?

Reasons

  • Higher Capacity Utilization of the manufacturing plants due to boom in e-commerce industry[7]
  • Ban on low-grade waste paper import in China under pollution control norms(September 2017)[5][6][7]
  • Increase in price of end-product in accordance with raw material(wood-pulp) price rise[7][8]

Listed Players

 

Top 10 Listed Paper Companies_2018

Table 2. Top 10 listed Paper Companies in 2018[3]

Selection Criteria

There are a few things to check in any paper company before making your investments[4].

  • Does it have its own power supply? If not, does it have a Purchase Power Agreement(PPA)
  • Raw material used for manufacturing  the paper
  • Labor Costs
  • Debt-Equity Ratio
  • Operating Margin
  • Product Portfolio

Conclusion

Paper Industry has a bright future as the companies will make good of the lost opportunity from 2013-2015 in the coming years. Considering this, paper stocks have rallied ~20% post the reasons listed above.

Subsequently, many companies will possibly be re-rated which can reduce their borrowing cost and help them create value for their long-term investors.

Kindly understand the company’s business and wait for a meaningful correction, if you really want to make an investment.

Further Reading

  1. https://www.icra.in/Rating/ShowMethodologyReport/?id=368&Title=Paper%20Industry&Report=Paper,%20Rating%20Methodology,%20Nov%202015.pdf
  2. http://www.capitalmarket.com/prebudget/2017-2018/Memorandum/Indian-Paper-Industry.pdf

References

  1. http://www.dsij.in/article-details/articleid/14254/paper-mill-stocks-hog-the-limelight-as-the-sensex-surges
  2. http://www.businesstoday.in/markets/ipo-corner/astron-paper-listing-on-bse-nse-premium-listing/story/266960.html
  3. http://www.moneycontrol.com/stocks/marketinfo/marketcap/bse/paper.html
  4. http://www.businesstoday.in/moneytoday/stocks/investment-trend-no-respite-for-stocks-of-paper-companies/story/200919.html
  5. https://www.reuters.com/article/us-china-hongkong-paperrecycling/china-ban-on-waste-imports-leads-to-piles-of-paper-abroad-surging-prices-in-china-idUSKCN1C30GR
  6. http://theconversation.com/china-bans-foreign-waste-but-what-will-happen-to-the-worlds-recycling-85924
  7. https://economictimes.indiatimes.com/markets/stocks/news/paper-stocks-on-a-tear-as-earnings-outlook-improves/articleshow/62375889.cms
  8. https://www.bloombergquint.com/business/2017/11/01/paper-industry-expects-prices-to-rise-soon
  9. http://www.moneycontrol.com/news/business/stocks/buy-seshasayee-paper-sp-tulsian-2486631.html
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