Margin pressure may hit paper cos in near-term despite price hike: Analysts

Investor interest in paper stocks seems to be far from over despite the near-term headwinds. Though the robust demand supports expectations of strong earnings going forward, analysts caution that the rise in input cost for paper manufacturers is likely to squeeze margins.

The rally in paper stocks began early September when states eased Covid-19 related restrictions and announced re-opening of schools and offices. It, however, picked up pace recently amid reports of likely imposition of anti-dumping duty on decor paper imports from China, and expectations of further price hikes due to increase in cost of raw material.

“After the re-opening of offices and schools, paper demand has been robust and price hikes have been seen across all categories. However, due to increased fuel prices and container shortage, the cost of shipping a container of paper overseas has increased. Further, pulp price, the raw material of paper and corrugated boxes, have shot up too on demand-supply mismatch,” highlights Likhita Chepa, senior research analyst at CapitalVia Global Research.

All these factors, she says, have forced paper manufacturers and distributors to hike prices domestically.

According to industry reports, most paper mills have hiked paper prices by Rs 2,000-3,000 per MT for October deliveries, after a 10-12 per cent price hike in the past one month. Going ahead, Chepa expects paper prices to rise further by 6 to 8 per cent.

On the regulatory front, a September 28 notification by Directorate General of Trade Remedies (DGTR) has recommended anti-dumping duty between $110 per MT to $542 per MT of decor paper imports from China.

The investigation, which was initiated after a complaint by ITC, revealed that due to increased import (in absolute terms), the profitability of the domestic industry has shown negative growth between April 2016 and March 2020.

Of the 24,227 MT of decor paper India produces, 70 per cent to 80 per cent comes from ITC Ltd. Pudumjee Paper Products Ltd and Shree Krishna Paper Mills & Industries Ltd are the other domestic manufacturers of the product.

Road ahead

Analysts believe the industry may witness demand uptick during the on-going fiscal year on a year-on-year basis backed by better paper demand and increase in its prices, but higher-than-expected rise in transportation costs could put pressure on the margin in the near-term.

“We believe with the re-opening of the economy and higher demand for paper products in domestic markets, sales will improve going forward. However, high raw material and other expenses may keep margins under pressure,” says Ajit Mishra, VP-research at Religare Broking.

From an investment view-point, Likhita Chepa suggests incumbent investors can hold the stocks from a medium-to-long term perspective, but new investors can either wait for better entry point after a recent run-up or pick stocks from other sectors which are more likely to benefit from economic revival.

Stock prices of paper companies such as Pudumjee Paper Products, JK Paper, Emami Paper Mills, and Star Paper Mills have rallied between 31 per cent and 96 per cent during the past six months, compared with a 22-per cent gain in the Nifty50 index and a 24-per cent rally in the Nifty500 index, ACE Equity data show. CLICK HERE FOR THE CHART

Since September, the stock prices have gained up to 23 per cent. In comparison, the Nifty50 and Nifty500 indices are up 4 per cent and 5 per cent, respectively during the period. CLICK HERE FOR THE CHART

Mishra, too, advises investors to be very selective and recommends JK Paper and West Coast Paper from a long-term perspective.

“We expect players like JK Paper to do well going forward in the copier paper space since their Gujarat plant is going on stream. Besides, owing to strong demand from the packaging segment for Boards and Apparel, West Coast Paper is another player which could fare well this fiscal,” concurs S Ranganathan, head of research at LKP Securities.