Top 4 Fundamentally Strong Paper Stocks Down up to 50% from Highs

The Indian paper industry is one of the largest manufacturers of paper globally with a revenue of about Rs 800 bn annually.

India is home to around 850 paper mills, which collectively produce about 25 million tonnes of paper each year. This production volume is expected to rise to 35 million tonnes by FY30, reflecting the robust demand for paper products across various sectors.

Rising literacy rates increased industrial activity, advancements in technology, sustainable practices, and greater demand for packaging materials are the factors that are promising 6% to 7% annual growth in the paper industry in India.

In this editorial, we have filtered out some of the paper stocks which have tanked up to 50% from the highs, during the past one year.

We have filtered out these stocks based upon their fundamental prospects and the recent corrections in the prices.

Let's have a closer look...

#1 JK Paper

Leading the list is JK Paper.

JK Paper is a top player in manufacturing and supplying packaging boards, and branded papers. It operates in 4 segments - writing and printing papers, coated printing papers, office and copier papers, and high-end packaging boards.

It also provides packaging solutions for various industry applications like FMCG, pharma, etc.

JK Paper has 3 pulp and paper mills, including CPM in Songadh (Gujarat) on the Western coast, JKPM in Rayagada (Odisha) near the Eastern coast of India, and SPM in Kagaznagar, Telangana.

It serves customers in more than 60 countries across the Middle East, the USA, South-East Asia, Europe, and Africa.

Coming to the financials of JK Paper, the company's revenue grew 2% YoY to Rs 16.8 bn.

The operating profit for the period saw a decline of 35.1% YoY to Rs 2.6 bn. The operating margin also declined to 16%, from 25%, in Q2 FY24.

On the net profit front, the company saw a decline of 57.5% YoY to Rs 1.3 bn. The net margin for the quarter stood at 7.6%, from 18.5%, in Q2 FY24.

Below is the chart showing annual performance of the share price.

The share price over the past year reached its highest point on 2 July 2024, at Rs 633.7. Currently, the stock is trading at Rs 425, representing a discount of 33% from its highest price within the past year.

Looking ahead, the company wants to focus on the packaging board segment and becoming one of the least cost manufacturers in the industry.

The management has acknowledged the industry is facing challenges from imports due to lower prices and surplus capacities in other countries.

While prioritising maintaining a small element of borrowing on the balance sheet, the company is expecting a return on investment of around 14-15%, over the long term.

For more details, see the JK Paper company fact sheet and quarterly results.

#2 West Coast Paper Mills

Next on the list is West Coast Paper Mills.

The company is one of the oldest and largest producers of paper for printing, writing, and packaging in India.

The company's product segments include printing and writing papers, premium printing papers, security and HI-value grades papers, MG varieties, business stationery, cup stock, and coated duplex board.

West Coast is the 5th largest paper manufacturer in India, with a consolidated capacity of 568,000 MTPA and has a strong market position in most segments.

Coming to the financials, the revenue saw a decline of 12.5% to Rs 10.4 bn.

The operating profit stood at Rs 1.4 bn, while the operating profit margin was at 14%, versus 26%, in Q2 FY24.

On the net profit front, the company saw a decline of 54% YoY to Rs 1 bn. The net profit margin consequently stood at 9.7% versus 18.3%, in Q2 FY24.

Below is the chart showing annual performance of the share price.

Over the past year, the share price peaked at Rs 782.8 on 30 January 2024. The stock is trading at Rs 572, which reflects a significant discount of 27% from its highest price in the past year.

The company in 2024 successfully doubled its manufacturing capacity for optical fiber cable by setting up a new manufacturing unit at Fab City, Hyderabad, Telangana.

Additionally, foreign institutional investors (FIIs) have maintained a bullish stance since the September 2022 quarter, consistently increasing their stakes in the company.

Moving forward, the company plans to implement strategies to alleviate margin pressure.

For more details, see the West Coast Paper Mills company fact sheet and quarterly results.

#3 Tamil Nadu Newsprint & Papers

Next on the list is Tamil Nadu Newsprint.

The company is engaged in manufacturing paper and paper boards best suited for the printing, writing, and packaging industry.

It also produces cement and generates power through wind energy for captive use.

TNPL started with the capacity of producing 90,000 tonnes per annum. After continuously multiplying its capacity, today it's up to 440,000 tonnes per annum, in an eco-friendly manner.

The company is the world's largest bagasse-based paper mill, consuming 1.4 million MT bagasse per year and ranking third in installed capacity and second in printing and writing paper production in the country.

Coming to the financials, the company saw a revenue decline of 4.5% YoY to Rs 9.1 bn.

The operating profit for the period saw a decline of 20.3% YoY to Rs 1.2 bn. The operating margin also declined to 13.7%, from 16.4%, in Q2 FY24.

On the net profit front, the company saw a decline to Rs 50 m. The net margin for the quarter stood at 0.2%, from 3.1%, in Q2 FY24.

Over the past year, the share price peaked on 30 January 2024, reaching Rs 324.8. Currently, the stock is trading at Rs 212, a significant discount of 35% from its highest price in the past year.

According to a media report, Tamil Nadu Newsprint and Papers is planning to expand its business with the thought of setting up a new unit for tissue manufacturing. Production of 100 tonnes of tissues per day is being projected.

This expansion plan will not only bring financial benefits but will also make its position strong in the market.

For more details, see the Tamil Nadu Newsprint company fact sheet and quarterly results.

#4 Kuantum Papers

Last in the list is Kuantum Papers.

Kuantum Papers is in the business of production and marketing of wood-free writing and printing paper.

The company is one of the largest fully integrated agro-based paper manufacturers in India committed to manufacturing wood-free, high-quality maplitho, cream wove, copier, and specialty paper.

It has a single manufacturing facility located Hoshiarpur, Punjab, spread across 259 acres. The facility has an integrated setup with a chemical recovery plant, co-gen power plant (38 MW), and effluent treatment facilities.

Coming to the financials, the company saw a revenue decline of 6.5% YoY to Rs 2.8 bn.

The operating profit for the period saw a decline of 24.7% YoY to Rs 610 m. The operating margin also declined to 22%, from 27%, in Q2 FY24.

On the net profit front, the company saw a decline to Rs 300 m. The net margin for the quarter stood at 10.8%, from 14.4%, in Q2 FY24.

The share price over the past year reached its highest point on 1 March 2021, at Rs 189.4. Currently, the stock is trading at Rs 135, a discount of 29% from its highest price in the past year.

The management acknowledged that Q2 FY25 was challenging for the paper industry due to high levels of imports, which pressured domestic demand.

However, it remains optimistic about a market recovery in Q4 FY25, while maintaining operating margins between 22% and 24% for FY25.

It added that the second half of FY25 is expected to remain muted, but a gradual improvement in demand is anticipated by Q4.

For more details, see the Kuantum Papers company fact sheet and quarterly results.

Conclusion

Despite many strengths and projections to reach 35 million tonne volume by FY30, the paper industry in India faces multiple problems that could hinder its progress.

Issues like raw material limits, high energy costs, old technology, environmental sustainability, division, skills shortage, etc., must be addressed through strategic interventions and modern management methods.

By embracing technological advancements, focusing on sustainability, and adapting to changing market dynamics, the industry can continue to thrive and contribute to India's economic and environmental goals.

Given all these risks, investors should be cautious. While the potential rewards are high, it's essential to approach the investments with a well-researched strategy.

Moreover, potential investors should conduct thorough research into the company's financials and corporate governance practices to ensure the investment aligns with their financial goals and risk tolerance.

Happy Investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...