JK Paper - Buy

JK Paper, one of the leading companies in the Indian paper industry, is tapping the market with its Rights offer, where the company is offering three shares for every four held by shareholders, at Rs 42. At the time of writing this analysis, JK Paper was quoting at Rs 44.70. The record date for the Rights entitlement is 27^th July, 2011. The issue opens on 8^th August, 2011, and closes on 23^rd August, 2011.

The company is a leader in the branded copier paper segment, with a market share of 28.8 per cent. The branded copier paper market size stands at nearly Rs 2500 crore in the country, and is growing handsomely. The company also produces packaging board paper and coated paper. It has a good distribution network and its own captive raw material facilities. Under its plantation program, the company has cultivated 80000 hectares of land. The rate of addition of land under plantation has been 6000-7000 hectares per year.

JK Paper has two plants one in Rayagada district, Orissa and the other one in Songadh, Gujarat. The company’s present installed capacity of paper, saleable pulp and virgin packaging board stands at 2.64 lakh TPA, which would increase to 4.14 lakh TPA once it is through with its expansion. At the same time, it is also expanding its captive power plant capacity from the present 19.9 MW to 55 MW. The expanded facilities would go onstream by February 2013.

JK Paper requires a total of Rs 1650 crore for its expansion activities. This would be funded through debt of Rs 1050 crore (already raised), FCCB of Rs 225 crore (already issued), the present Rights issue of Rs 246 crore and the balance through internal accruals. The FCCB holders have the option of converting their bonds into equity shares at Rs 65 per share any time after three and half years, subject to certain conditions. In case the bonds are not converted, they would be repaid from the fifth and seventh year of the issue.

The market for paper is currently valued at Rs 40000 crore, and is expected to grow at the rate of 10.7 per cent. The main demand drivers will be the ‘Sarva Shiksha Abhiyan’ and the growth in the FMCG, telecommunication and advertising sectors. The demand for paperboard is expected to rise at a CAGR of 7.8 per cent, while the white paper and writing paper segment is expected to grow by 7.6 per cent in the next five years. The copier paper segment, which is the leading product of JK Paper, is growing at 16 per cent.

The company reported consolidated sales of Rs 1251 crore for the year ended March 2011, against last year’s figure of Rs 1122 crore. Its profits stood at Rs 107 crore, against Rs 92 crore last year. However, in the first quarter of the current year, the net profit declined from Rs 29.11 crore to Rs 24.26 crore, despite a rise in sales. This is due to higher input costs that the company could not pass on to its customers. Its expanded equity after the Rights (not considering FCCB dilution) would be Rs 136.76 crore. Assuming that the company is able to report the same net profit numbers for the current year, the EPS would be Rs 7.82. The offer price discounts the same by only 5.37 times. We believe that JK Paper’s expansion would bring about better financial numbers, which would result in the rerating of the counter. Also, the recent acquisition of Andhra Pradesh Paper Mills by International Paper at a good valuation means that the sector is waiting to be rerated. We advise readers to go for the Rights issue with at least 24-30 months time horizon. Investors can look at a 25-30 per cent CAGR of capital appreciation from the counter.

(Note: For more information on the company, readers can refer to the DSIJ issue dated June 20-July 03, 2011, where we recommended JK Paper under the Low Priced Scrip column.)

*Assuming that Rights issue is fully subscribed