- Zero maintenance charges
- Zero fees for demat account opening
- Volume based brokerage
Read More >
-
Stock Recommendation | JK PAPER LIMITED – BUY – Target Price : 200
Publish date: DECEMBER 21, 2018
JK Paper (JK) will benefit strongly from a) surge in global pulp prices due to ban on imports of waste paper in China and low dependence of company on imported raw material compared to domestic peers, b) In-house pulp manufacturing and focus on farm forestry for raw material procurement likely to support margins, c) Acquisition of Sirpur unit and a brownfield capacity expansion in Gujarat will increase overall capacity by ~338KT/74% and d) imposition of anti-dumping duty on uncoated paper further supports profitability of domestic companies while investigation for coated papers is under process. Indian paper industry is expected to grow at a CAGR of 6.6% over the next 3-4 years. With the acquisition of Sirpur unit, we believe JK Paper will gain market share in the coming years and also help the company to supplement its product portfolio. Operating margins is expected to improve by 400 bps YoY in FY19E to 25.5% and likely to remain in the range of 24-25% in the near term. PAT is expected to register CAGR of ~16% during FY18-FY21E period. At CMP stock is trading at 6.9x/6.8x/6.9x FY19E/20E/21E earnings. We initiate coverage with a BUY rating and a target price of Rs.200.
■ Backward Integration and focus on farm forestry to support margin: We believe that JK Paper is in a sweet spot due to a) increased domestic sourcing of wood, b) weak domestic prices of wood and c) rising global pulp prices thereby increasing cost curve. JK Paper enjoys operating efficiencies because of its integrated production capacities, as a significant portion of wood pulp (pulp capacity of 276,000 TPA) and power requirements (80 MW) are met through captive production. Further, to reduce its dependency on third party for raw material sourcing, the company is running social forestry and farm forestry in Orissa, Gujarat, Maharashtra and Andhra Pradesh, covering a total area of 1,50,000 hectares, which helps them to source ~52% of total raw material consumption. Further reclassification of bamboo from forest produce to non-forest produce in Nov, 2017 shall increase the wood supply in the domestic market over the long run and will eventually benefit the local companies. Besides this, JK Paper is also focused on sourcing 71% of its raw material requirement from within a radius of 200 kms which results in reduced logistics cost. Given the captive procurement (52%) of raw materials and lower logistic costs, we expect operating margins to expand by 400bps in FY19E and likely to remain in the range of 24-25% in FY20E and FY21E (from 21.5% in FY18). The expansion in margins is also supported by increase in average realization in a rising global cost curve scenario. We expect realization to remain firm for FY20 and FY21.
■ Strong market position with presence in high quality brands: JK Paper is a leader in India's copier paper segment with a market share of 23%, the second-largest in the coated paper segment (market share of 12%) and a leading player in the packaging board segment, having market share of 11%. Its presence in copier paper, coated paper and flexible board are relatively less fragmented compared to paper industry. We believe, JK Paper’s position will further strengthen in terms of product offerings and help the company to gain market share with the operation of Sirpur unit (starting FY20E) and completion of brownfield expansion plan of 200,000 tonnes in Gujarat. Besides this, the strong marketing and distribution policies assure the company on faster product reach and better connect with the market.
■ Sirpur Acquisition to add ~30% capacity: JK Paper had shown interest in multiple assets, but due to disagreements on valuations, deal didn’t materialize. This shows, management’s conservative approach. Finally, JK Paper was successful in acquiring Sirpur Paper mill with an installed capacity of ~138KT (~30% of JK current capacity) by infusing Rs3.71 bn, post NCLT approval. This consists of a cash payment of Rs1.66 bn and issue of equity shares of Rs430 mn and preference shares of Rs1.62 bn. The management expects this plant to be fully operational in Q1FY20E. We believe, this acquisition will be EPS accretive to the company, supported by subsidies given by Telangana government, in terms of wood, coal and electricity duty.
■ Imposition of anti-dumping duty to boost profitability: The Government recently imposed anti-dumping duty (ADD) on certain kinds of uncoated paper from Indonesia, Thailand and Singapore for the period of three years to protect interest of domestic companies. The duty currently stands at difference between the landed value of the product and USD855/tonne. We expect, JK Paper to gain on the imposition of anti-dumping, as company’s uncoated printing and writing paper capacity stands at 292KT (third largest). ADD will be beneficial to the paper industry in a falling realization scenario.JK Paper is a leader in India's copier paper segment, the second-largest in the coated paper segment and a leading player in the packaging board segment. We believe that, given the high cost curve globally and benefit of Sirpur paper mill to start accruing from 1QFY20E onwards, JK Paper growth rate is likely to be higher than the market and will also help the company to gain the market share. Besides this, the company’s focus on increasing farm forestry to fulfill its raw material requirements and capacity expansion at Gujarat, augurs well for the company. At CMP, the stock trades at 6.8x/6.9x FY20E/21E earnings. We initiate coverage on stock with BUY rating and a target price of Rs.200, valuing on SoTP basis. Valuing standalone operations at 8x FY20E earnings (25% discount to its 10 years average) and Rs18 from Sirpur operation.
Key Risks:
i) Significant capacity additions by domestic paper producers may result in increased supply in domestic markets (We believe, any fresh expansion either brownfield or greenfield would take 3-4 years to come on stream);
ii) Increase in crude prices, unavailability of water may lead to increase in cost of production;
iii) Slowdown in paper industry may result in underutilization of capacityBUY - We expect the stock to deliver more than 12% returns over the next 12 months ACCUMULATE - We expect the stock to deliver 5% - 12% returns over the next 12 months REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months SELL - We expect the stock to deliver negative returns over the next 12 months NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE - We advise investor to subscribe to the IPO. RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA - Not Available or Not Applicable. The information is not available for display or is not applicable NM - Not Meaningful. The information is not meaningful and is therefore excluded. NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.
Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management.
Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014.
We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise/warning/deficiency letters/ or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time.
We offer our research services to clients as well as our prospects.
This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions.
This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.
We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options and other derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals.
Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.
Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
We and our affiliates/associates, officers, directors, and employees, Research Analyst(including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of Research Report or at the time of public appearance. Kotak Securities Limited (KSL) may have proprietary long/short position in the above mentioned scrip(s) and therefore may be considered as interested. The views provided herein are general in nature and does not consider risk appetite or investment objective of particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with KSL. Kotak Securities Limited is also a Portfolio Manager. Portfolio Management Team (PMS) takes its investment decisions independent of the PCG research and accordingly PMS may have positions contrary to the PCG research recommendation. Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector or business group in any manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and take professional advice before investing.
The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent. Details of Associates are available on www.kotak.com
Research Analyst has served as an officer, director or employee of subject company(ies): No
We or our associates may have received compensation from the subject company(ies) in the past 12 months.
We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months: No
We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies).
Research Analyst or his/her relative's financial interest in the subject company(ies): No
Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: Yes
Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report.
Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No.
Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No
Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report.
"A graph of daily closing prices of securities is available at https://www.nseindia.com/ChartApp/install/charts/mainpage.jsp and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the "three years" icon in the price chart)."
Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com/www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230, MSE INE 260808130/INB 260808135/INF 260808135, AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually trading in derivative contracts. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: ks.compliance@kotak.com.
In case you require any clarification or have any concern, kindly write to us at below email ids:
● Level 1: For Trading related queries, contact our customer service at 'service.securities@kotak.com' and for demat account related queries contact us at ks.demat@kotak.com or call us on: Toll free numbers 18002099191 / 1800222299, Offline Customers - 18002099292
● Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at ks.escalation@kotak.com or call us on 022-42858445 and if you feel you are still unheard, write to our customer service HOD at ks.servicehead@kotak.com or call us on 022-42858208.
● Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Mr. Manoj Agarwal) at ks.compliance@kotak.com or call on 91- (022) 4285 8484.
● Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at ceo.ks@kotak.com or call on 91- (022) 4285 8301.
Also read
- Read our latest stock recommendations
- Check out market strategy research
- Live insights about stock markets
- HDFC Bank Q1 result: Key highlights
- How to attain financial freedom
Don't have an account? Click here to open an account
