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% .
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.
Table 1. Heavily leveraged paper companies in 2013
What is the reason behind the sudden reversal of fortune?
- Higher Capacity Utilization of the manufacturing plants due to boom in e-commerce industry
- Ban on low-grade waste paper import in China under pollution control norms(September 2017)
- Increase in price of end-product in accordance with raw material(wood-pulp) price rise
Table 2. Top 10 listed Paper Companies in 2018
There are a few things to check in any paper company before making your investments.
- 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
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.