Fundamental Analysis of JK Paper

All the companies in the industries are reporting high Operating and Net profit margin because of the up cycle. The company is trying to diversify into the boxes manufacturing segment and has recently done acquisition of Horizon Packs Private Limited (HPPL) and Securipax Packaging Private Limited (SPPL) in December 2022 that are leading players across seven locations in North, West and South India. Apart from this, the company is setting up a corrugated boxes capacity in Ludhiana, Punjab, for which it has already incurred about INR1.4 billion and could incur another INR 0.3 billion in FY23.

JK Paper has done fairly well in the last 5 yeast operating in a cyclical industry, working on strategic acquisitions, and diversifying product segments. with high margins at their peak caution is advised due to the undifferentiated nature of products and customer negotiation power. The recent acquisition of Horizon Packs and Securipax enhances JKPL's position in corrugated boxes margin fluctuations should be closely monitored.

About the company

Incorporated in 1960, JK Paper (JKPL) is among the top five paper manufacturers in India, the one of the largest manufacturers of writing and printing paper, and a significant player in the packaging segment.

The company operates three manufacturing plants with a total capacity of 761,000 tonnes per annum, located in Songadh (Gujarat), Rayagada (Odisha), and Sirpur Paper Mills (Telangana). The company expanded its presence in the Corrugated Packaging business by acquiring 85% stakes in Horizon Packs Pvt. Ltd and Securipax Packaging Pvt Ltd in December 2022 for Rs 578 crores. An additional acquisition of Manipal Utility Packaging Solutions Pvt Ltd is expected in November 2023 for approximately Rs. 90 crore.

After completing its first VFB plant in January 2022, JKPL became the second-largest paper and packaging board manufacturer in India, boosting its manufacturing capacity to 761,000 MTPA from 591,000 MTPA in FY21. With a six-decade track record, JKPL holds a leadership position in copier paper, capturing a market share of ~30% in FY23. The company has also gained a 19% share in the VFB segment, one of the fastest-growing segments in the paper industry.

The paper industry, with over 750 mills, remains fragmented, but JKPL stands out among the few with a capacity exceeding 50,000 MTPA and comprehensive integration. The recent acquisitions have positioned JKPL as a key player in corrugated boxes.

In Aug-2018, JK Paper acquired Sirpur Paper Mills, integrating a paper and pulp mill with a capacity of 1,38,000 tonnes per annum. The company's annual capacity stands at 5,91,000 tons of paper and paper boards, with 86% of volume derived from the domestic market and 14% from exports in FY21.

Product Segment Review:

Copier: Contributes 41% to total JKPL sales. Recognized for superior quality and widespread availability nationwide.
Writing and Printing Paper: Contributes 22% to total JKPL sales. Witnessed demand recovery to pre-Covid levels, with some market volatility due to excessive imports.
Packaging Paper: Contributes 37% to total JKPL sales. Experienced traction in the first half of 2022-23, driven by demand from FMCG and pharma sectors, but weakened in the second half.

History

Established in 1960, JK Paper operates two manufacturing facilities in Songadh, Gujarat, and Rayagada, Orissa. The Songadh plant specializes in copier paper and paper boards, while the Rayagada unit produces copier and coated paper. In August 2018, the company acquired Sirpur Paper Mills, adding a capacity of 1.36 lakh tonnes through the National Company Law Tribunal (NCLT) process, with a total enterprise consideration of Rs 750 crore, inclusive of incremental capex and working capital investments. JK Paper introduced new products such as JK VFL, JK UFL, JK Color Kraft, and JK Pac Fresh, among others. Product categories launched in 2020-21 included Color Kraft paper, Kraft liner paper, JK Pac Fresh, JK Sublime paper (rolls), and Liquid packaging board.

Industry Overview

Cyclical Industry: The paper industry exhibits cyclical patterns, facing volatility in raw material prices and the threat of imports. Companies may struggle to pass on increased raw material costs due to potential downward pressure on finished product prices from lumpy capacity additions not aligned with demand growth, leading to weakened profit margins.

Global Paper and Packaging Industry Overview: The global paper and packaging board market, valued at US$ 195 billion in 2022, is projected to reach US$ 232.8 billion by 2028, with a 3% CAGR. In 2022, the global paper and paper board packaging market contracted by about 0.5%, attributed to declines in the printing and writing paper segment (2%) and packaging paper segment (1%), influenced by changing consumption patterns, inflation, and COVID policies. Tissue paper segment witnessed a 3% growth. Environmental consciousness and regulations against plastic use are expected to drive the paper packaging market, particularly in the food and beverage industry.

Paper and Pulp Prices: Global pulp prices reached a record high in 2022-23 due to increased demand post-COVID and higher energy costs in Europe from the Russia-Ukraine war. Panic buying and low pulp inventory led to higher prices, but a demand slowdown in Q4 2022-23, especially in China, resulted in a correction, potentially reaching the lowest levels in the coming months.

Indian Paper and Packaging Industry Overview: The Indian paper and paperboard packaging market was valued at US$ 10.77 billion in 2022, projected to reach US$ 15.69 billion by 2027, growing at a 6.63% CAGR. Packaging-grade paper constitutes 55% of the production. The printing and writing paper market is expected to grow at a CAGR of 1.8% during 2022-2026, driven by factors like population growth, office reopenings, and traction in pharmaceuticals and e-commerce. The Indian packaging industry, fueled by rising disposable income and consumer awareness, faces challenges from surplus capacities in China and Indonesia, potentially leading to dumping at cheaper rates. The industry is fragmented, with the government's initiatives like Make in India and packaging parks aimed at boosting domestic production, employment, and technological development.

Competitors

West Coast Paper, Andhra Paper, Century Textiles, Kuantum Papers and Seshasayee Paper. JK Paper being intergrated player have better financial and operational metrics as compared to its peers

Promoters 

Bengal & Assam Company Limited

Management

Shareholding Pattern

Valuation

The script is currently trading at a P/E ratio 5.3 which is below it’s 5 year median of 7.5 and 10 year media of 10.

Key Ratios












Risks

The company operates in a cyclical industry with undifferentiated-commodity products where the customers/dealers have a high negotiating power over them.

Conclusion

JK Paper has demonstrated resilience and growth in a cyclical industry, backed by strategic acquisitions and diversification efforts. The recent moves into corrugated boxes and expansion in Ludhiana, coupled with the company's financial performance, contribute to its positive outlook. However, caution is advised due to the nature of undifferentiated products and the industry's cyclical nature. Monitoring margin fluctuations and staying informed about industry dynamics will be crucial for investors.

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