Single-use plastic ban sees paper stocks rally. Are the gains sustainable?

It has been a dream run for the paper stocks in the last one month as the scrips have rallied up to 85 per cent. The biggest reason behind the rally, as per experts, is the government's announcement to ban single-use plastics to curb pollution. The announcement has been the shot in the arm for most paper stocks. 

Consider this. Last week, as many as 14 stocks from the sector gained 10 per cent or above as compared to a modest 0.64 per cent gain in the benchmark S&P BSE Sensex. Balkrishna Paper Mills, up 29 per cent, was the top gainer in this space followed by Star Paper Mills (up 26 per cent), ACE Equity data show.

So, is the rally sustainable and should you lap up paper stocks now?

Terming the recent rally a repeat of June 2018 when reports of a ban on single-use plastic did the rounds, most analysts now appear cautious on the sector. Weak fundamentals, increase in global pulp prices and intense competition from unorganised sector are some of the reasons that have made analysts cautious on this segment. That apart, considering paper to be the sole alternative to plastic is irrational as jute and cloth bags are gaining popularity, they say, and expect the rally to fizzle out soon. 

“Global pulp prices are expected to remain high, which will continue to put pressure on the margins. India imports majority of the pulp for making paper. Given that the rupee is unlikely to depreciate further, the profitability of these paper stocks will not show any significant improvement going ahead. Fundamentally, too, they aren’t the strongest in the current economic scenario,” notes Umesh Mehta, head of research at Samco Securities.

According to India Ratings and Research (Ind-Ra), paper imports increased 26 per cent on quarter-on-quarter (q-o-q) basis and 40 per cent year-on-year (y-o-y) in the first half of financial year 2019-2020 (Q1FY20) to 0.57 million tonnes (mt), reversing the decline witnessed over FY19. The increase, Ind-Ra said, was mainly driven by an influx of import from China after the US government increased import duty on Chinese products to 25 per cent from 10 per cent. 

"Proactive government policies such as recent imposition of custom duty on newsprint are, however, likely to provide some relief from heightened competition from imports," it said in its recent report.

Operational performance

At the fundamental level, some companies are under heavy debt and are coping with working capital issues. A rise in raw material cost, analysts say, will further strain operational performance. 

Ajit Mishra, vice president - Research at Religare Broking says the process to eliminate single-use plastic would be gradual and it would take three-four years to meaningfully impact the profitability of paper companies. “Further, with easy availability of other substitutes for plastic, high debt level in the paper industry and thin margin profile we believe the upside would be limited,” he said.

JK Paper, Orient Paper Mills, and Tamil Nadu Newsprint and Papers are the top picks of IDBI Capital in the paper segment. Going forward, demand for stuff such as tableware, plastic cups, plates, among other things, will shift to paper, thus driving the stocks higher. However, one needs to be invested in them for the long term.

"The government's move has given an impetus to paper stocks, since it is viewed as a viable alternative for plastic products,” says Archana Gude, an analyst tracking paper industry at IDBI Capital.

Stock performance in last one week

Company Name	Closing price as of Sept 13, 2019	Closing price as of Sept 9, 2019	% change
Balkrishna Paper Mills Ltd.	33.95	26.30	29.09
Genus Paper & Boards Ltd.	6.42	4.98	28.92
Star Paper Mills Ltd.	135.95	107.90	26.00
Pudumjee Paper Products Ltd.	16.67	13.35	24.87
Yash Papers Ltd.	59.80	50.15	19.24
Sangal Papers Ltd.	96.35	83.75	15.04
Malu Paper Mills Ltd.	28.15	24.65	14.20
Rushil Decor Ltd.	170.40	151.70	12.33
Coral Newsprints Ltd.	5.55	4.95	12.12
Shree Rama Newsprint Ltd.	18.32	16.51	10.96
JK Paper Ltd.	131.15	118.50	10.68
Ruchira Papers Ltd.	98.10	88.70	10.60
3P Land Holdings Ltd.	6.99	6.35	10.08
Emami Paper Mills Ltd.	86.00	78.25	9.90

(Source: ACE Equity)