JK Paper: Net Profit Down, Margins Squeezed
Shrikant / 23 Jan 2012
JK Paper, a leading paper products’ company, announced its quarterly results on Saturday, January 21, 2011. The company has disappointed with its results wherein its profitability was impacted by the higher input costs. Its topline increased by 4 per cent to Rs 327.36 crore compared to Rs 313.86 crore in the same quarter last fiscal. Its bottomline, however, declined by a whopping 70 per cent to Rs 7.42 crore from Rs 25.11 crore a year-ago period. The company reported lower EBITDA margins compared to the same period last year.
In the paper industry, wood (pulp) and fuel costs form a major part of the financial inputs. JK Paper witnessed a rise of 26 per cent in the raw material costs (wood) in this quarter on a YoY basis. Even though the prices of pulp have softened in the last nine months, the sharp fall of the rupee has provided no respite. The power and fuel costs have also increased by 44 per cent on a YoY basis. The decreased coal supply from its coal linkages resulted in buying this material from the open market at higher prices.
Also, due to the rainy season the quality of the coal was not in line with the requirement, thereby requiring additional feed to keep running the boilers. As a result of all this, its EBITDA margins shrunk from 21 to 9 per cent in Q3FY12. Even for the nine months ended December 2011, its EBITDA margins have declined by 900 basis points to 13 per cent. One can also see that the contribution of the fuel and raw material costs in its total costs has gone up from about 47 per cent to 52 per cent within a year.
Table 1 Increased contribution of fuel and raw material costs
|
Type |
Dec-11 |
Dec-10 |
9MFY12 |
9MFY11 |
|
Raw material costs |
36% |
33% |
36% |
32% |
|
Power fuel and water |
16% |
13% |
16% |
13% |
|
Total |
52% |
47% |
52% |
46% |
The company is currently expanding its manufacturing capacities from 2.64 LTPA to 4.14 LTPA which is expected to come on stream by the end of this year or early next year. Fortunately, it has the ability to partially pass on the prices to the consumers. For example, recently it hiked the price of paper by Rs 1,500 per tonne. Investors however must take note of the Chinese factor even in the paper industry. The US and European countries have recently imposed about 47 per cent duty on Chinese coated paper due to which there is a sharp rise in exports from China to India. Due to the low prices of Chinese papers, the domestic paper prices have remained a little subdued, thus threatening the profitability of the paper companies.
As such, we expect the demand to remain strong with the profitability remaining under pressure even in the next quarter as a result of the increased coal prices by Coal India and the higher US dollar as compared to the rupee. The management has hinted at a hike in paper prices in the current quarter which may partially offset the increased input prices. Investors may therefore look forward to buying the stock during its dips and when the rupee shows significant appreciation against the dollar.
|
Particulars |
Quarterly |
9 month ended December 2011 | ||||
|
Dec-11 |
Dec-10 |
% change |
9MFY12 |
9MFY11 |
% change | |
|
Sales |
383.46 |
367.46 |
4% |
1137.77 |
1069.65 |
6% |
|
Total income |
327.36 |
313.86 |
4% |
973.15 |
919.14 |
6% |
|
Raw material costs |
112.58 |
89.3 |
26% |
325.04 |
249.59 |
30% |
|
power fuel and water |
51.5 |
35.67 |
44% |
144.45 |
103.11 |
40% |
|
Total expenditure |
315.57 |
266.66 |
18% |
903.66 |
770.15 |
17% |
|
Depreciation |
18.51 |
18.19 |
2% |
54.71 |
53.81 |
2% |
|
EBITDA |
30.3 |
65.39 |
-54% |
124.2 |
202.8 |
-39% |
|
EBITDA % |
9% |
21% |
-56% |
13% |
22% |
-42% |
|
Interest expense |
8.69 |
11.72 |
-26% |
31.9 |
34.39 |
-7% |
|
Tax expense |
-1.93 |
10.91 |
-118% |
3.11 |
33.07 |
-91% |
|
Net profit |
7.42 |
25.11 |
-70% |
38.2 |
83.3 |
-54% |
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