Plastic Ban: A Boon for Paper and Jute Stocks

Banning usage of plastics in Maharashtra has triggered correction in several stocks. DSIJ Research Team finds out how the plastic ban is proving to be a boon for several companies. Read on to know which stocks are benefiting from plastic ban... 

Social media is strewn with ceaseless reports highlighting plastic disposal and its harmful effects on sea life, the ecosystem and various carcinogenic threats arising from the use of plastic. This has triggered many Indian states to ban plastic. Around 17 states/ union territories have taken tiny steps to ban plastic products. Maharashtra followed the suit on March 23, 2018, imposing a ban on manufacture, use, sale, distribution and storage of all plastic materials. 

Due to this Go Green initiative of the Maharashtra government, many plastic stocks listed on the BSE got hammered. The news triggered a major sell-off in plastic product manufacturing companies. The small and micro-caps were most impacted as these companies were more vulnerable and had few product offerings. Sentimental factor also pulled down the stocks of below-mentioned companies that do not have a direct exposure to the recent plastic ban, but still have delivered negative returns. As the news created a sell-off, some companies saw further correction with Raj Packaging Industries, TPL Plastech, AMD Industries correcting by 23%, 20% and 18% over the last one month. Though they were to be least impacted by the banned items.

This was not a blanket ban and banned items included one-time use bags, spoons, single-use disposable dish, cups, plates, glasses, fork, bowl, container, disposable dish/ bowl used for packaging food in hotels, spoon, straw, non-woven polypropylene bags, cups/ pouches to store liquid, packaging with plastic to wrap or store the products, packaging of food items and food grain material and thermocol items. This generally mixes with food waste and generates non-biodegradable waste. 

However, the ban will not be applicable to plastic bags or plastic used in the packaging of medicines, compostable plastic bags or material used for plant nurseries, horticulture, agriculture and handling of solid waste. Plastic manufacturing companies appealed to HC to stay the ban which was declined. However, the court gave a temporary relief by providing a period of three months to the manufacturers, distributors and retailers to dispose of their existing stock of plastic.

There are few stocks which are likely to have an adverse impact of this development. The companies which offer products that are banned by the state government are Pankaj Polymers and Biopac India Corporation, both produce disposable ware. Both the stocks corrected sharply by 19% (Pankaj Polymers) and 9% (Biopac India Corporation) over the last one month. 

Due to this ban, 50,000 SMEs are going to be impacted which provide employment to about 4 lakh people. These SMEs have urged the government to scrap the plastic ban and instead make consumers more aware of ways to dispose of plastics. However SC has not accepted the request for stay on the ban. Prakash Javadekar, Union Minister of State for Environment, Forest and Climate Change said that out of 15,000 tonnes of plastic waste generated each day, 6,000 is not collected. This problem of plastic waste disposal is swelling day by day. 

Mckinsey& Company has estimated that by 2050, oceans are expected to have more plastics by weight than fish and the entire plastic industry will consume 20% of the total oil production and 15% of the annual carbon budget. Also, plastic takes anything more than 500 years to decompose. So most of the plastic that was produced since the time of its invention is still on earth, unless burnt or reused. Understanding the severity of this issue, companies have been venturing into plastic recycling. However, recycling poses the problem of downcycling which is usually contaminated and is not Virgin. Example: A pet bottle cannot be recycled to a Pet bottle, but a lower grade plastic product or fiber. Many companies are venturing into plastic recycling as it provides a huge business potential. 

One of the companies which is involved in PET recycling business is Ganesha Ecosphere established in 1987. The company has a dominating market share of 25 per cent in the PET recycling industry. P&G too has been moving into the Zero waste mode and has set up facilities in Mandideep and Baddi. Here, non-recyclable plastic laminate materials are shredded and pressed into low-cost building panels. Gravita has too entered into commercial production of PPCP Granules at its Andhra Pradesh plant in April 2018, having an annual capacity of 1,200 MTPA. The production from this plant will furnish the needs of Injection Moulding and Non-woven fabric industry, globally. 

Going ahead, this Go Green initiative is likely to open up new opportunities mainly for the companies which are in the manufacturing business of plastic bags, cloth bags and jute bags. Also, on January 5, 2018, the government has imposed anti-dumping duty ranging from US$6.30 to 351.72 per tonne on imports of jute and its products from Nepal & Bangladesh. This move would help the Indian Jute companies to improve their margins, going ahead. The name of the companies which are mainly engaged in jute and jute products business and the improvement in their stock prices are mentioned below.Also, this ban is likely to be beneficial to the paper industry as well because paper bags are the best substitute and it is eco-friendly and lightweight. The name of the companies which are engaged in Paper business and the significant improvement in their share prices are mentioned below.

Switching to eco-friendly products is a more viable option as it can create a sustained solution. Plastic recycling can be done to a certain extent and changing form doesn't fix the issue of disposing of plastic. The consumer also should be encouraged to buy recycled plastics rather than virgin plastics. Plastics are here to stay in varied forms, while new technological innovations in eco-friendly, bio-degradable packaging is bound to be in limelight. India needs to follow example of countries like Ireland and Denmark which have successfully been able to reduce plastic usage by 80% by 2018. This offers plethora of opportunities for government, industries and consumer to work towards effective waste management. 

Conclusion 

Going ahead the " Go green " trend in India may gather more steam. Socially conscious investors can benefit by investing in those companies that help this initiative . Investors are better off avoiding investment in those plastics companies that have few product offerings. Instead of betting on the government or SC reversing its decision on plastic bans investors would gain by identifying companies that provide an alternative to plastics. 

NR Agarwal Industries 

CMP : Rs 515.50
BSE CODE : 516082
Face Value : Rs 10
BSE Volume : 1009 

NR Agarwal Industries Ltd (NRAIL), is in the business of manufacturing finished paper products by recycling waste paper. The company is one of the largest manufacturers of recycled grey back and white back duplex boards (DB) in the country. In 2014, the company forayed into writing & printing (W&P) paper segment. NRAIL earns around 48 per cent revenues from DB, around 43 per cent from W&P and the remaining from newsprint. The company’s capacity utilisation for duplex boards is about 97 per cent and for writing and printing paper it is about 91 per cent. About 10 per cent of NRAIL’s revenue is from exports to Sri Lanka, Middle East, Bangladesh and Africa. 

The company is undertaking a techno-economic viability study with the professional assistance of Ernst and Young LLP for setting up a new 500 TPD Kraft paper unit as a part of its expansion plan. The Kraft segment is expected to witness highest growth amongst all paper segments on the back of requirement for better quality packaging of FMCG products through organised retail and increasing preference for readyto-eat foods. 

NRAIL’s promoter shareholding was earlier entirely pledged. But now the entire shares of promoters have being released, which augurs well for the company and for the investors. Also, recently, Bank of Baroda lowered interest rate on term loan and cash credit for the company from about 12.25 per cent to about 11 per cent. 

On the financial front, the company’s revenue increased 19.80 per cent from Rs 263.07 crore in Q3FY17 to Rs 315.17 crore in Q3FY18. The company’s PBDT also improved 23.65 per cent to Rs 32.47 crore in Q3FY18 from Rs 26.26 crore in Q3FY17. The company’s net profit also rose from Rs 20.1 crore in Q3FY17 to Rs 25.85 crore in Q3FY18, registering an increase of 28.61 per cent. 

On an annual basis, NRAIL posted 16.86 per cent increase in its revenue to Rs 1,040.54 crore in FY17 from Rs 890.42 crore in FY16. The company’s PBDT increased 251.74 per cent to Rs 97.01 crore in FY17 on a yearly basis. The company’s net profit increased tremendously by 293.89 per cent to Rs 70.23 crore from Rs 17.83 crore for the corresponding period previous year. 

On the valuation front, the company maintained a PE ratio of 9.77x as against its peers JK Paper (10.54x). The company’s return on equity (RoE) and return on capital employed (RoCE) stood at 57.97 per cent and 19.54 per cent, respectively. The company has a good RoE track record with 3 year RoE of 26.31 per cent. The company has good consistent profit growth of 39.59 per cent over the last 5 years. 

Considering the headroom for growth in paper due to low per capita consumption of paper in India as well as due to increasing demand by burgeoning FMCG and packaged food industry; and also considering the company’s plans to foray into Kraft paper (which is expected to witness the highest growth amongst all paper segments), we recommend a BUY on the stock.