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].
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
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
- https://www.icra.in/Rating/ShowMethodologyReport/?id=368&Title=Paper%20Industry&Report=Paper,%20Rating%20Methodology,%20Nov%202015.pdf
- http://www.capitalmarket.com/prebudget/2017-2018/Memorandum/Indian-Paper-Industry.pdf
References
- http://www.dsij.in/article-details/articleid/14254/paper-mill-stocks-hog-the-limelight-as-the-sensex-surges
- http://www.businesstoday.in/markets/ipo-corner/astron-paper-listing-on-bse-nse-premium-listing/story/266960.html
- http://www.moneycontrol.com/stocks/marketinfo/marketcap/bse/paper.html
- http://www.businesstoday.in/moneytoday/stocks/investment-trend-no-respite-for-stocks-of-paper-companies/story/200919.html
- 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
- http://theconversation.com/china-bans-foreign-waste-but-what-will-happen-to-the-worlds-recycling-85924
- https://economictimes.indiatimes.com/markets/stocks/news/paper-stocks-on-a-tear-as-earnings-outlook-improves/articleshow/62375889.cms
- https://www.bloombergquint.com/business/2017/11/01/paper-industry-expects-prices-to-rise-soon
- http://www.moneycontrol.com/news/business/stocks/buy-seshasayee-paper-sp-tulsian-2486631.html
Lateral Thinking 
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