Oct 17, 2016

www.niveshmoney.com

JK PAPER LTD.

Investment Advisor
Hardik Shah
+919819403408
hardik@niveshmoney.com

JK Paper Ltd. (JKP) part of the JK group, is a dominant player in the domestic paper industry. JKP is
the market leader in branded copier paper segment and among the top 2 players in coated paper
and highend packaging boards. India accounts for ~3% of the worlds production of paper and is the
15th largest market globally. However, the per capita consumption of paper and paperboard in India
is 11kg; far below than the global average of 57kg. As per global industry research reports, Indian
paper demand is expected to increase at 6.8% CAGR to 19.1 million tonne (MT) over FY15-19E with
coated paper and packaging board segment expected to grow at 7.9% and 9.1%, respectively. To
reduce cost in FY14, JKP had increased capacity (paper capacity by
1,65,000 tonne per annum (TPA) and pulp capacity by 2,15,000 tpa), modernized its paper plant in
Rayagada (Odisha) and increased focused on social farm forestry has resulted in expansion in gross
margins and a reduction of 15% in overall power, fuel & water cost. For FY16 sales volume increased
by 16% to 4, 59,977 tonne, EBITDA increased by 58% YoY to Rs. 408 crore with margins expanding
463bps to 16.6%. The company turnaround at net level and reported a profit of Rs. 73 crore.

Investment Rationale

Nifty : 7,850; Sensex : 25,627

MARKET DATA
Bse Code
Nse Symbol
Sector
Mrk Cap (Rs. Cr)
52 Week H/L
Promoter
Institutional Investors
Other
Total Share
CMP
Target Price

Leading player in the domestic paper industry: JKP has a total saleable product capacity of
532162
JKPAPER
PAPER
1203.10 Cr
82.90/40.15
57.74
42.26
0.00
100.00
79.55
104

4,55,000 tpa operating at full utilization level and offers a wide range of products. JKP is the market
leader in branded copier paper segment with a market share of ~27% and is amongst the top 2
players in coated paper (market share of 12%) and high-end packaging boards (16%). JKP was the
first company to introduce branded copier paper and surface-size wood free paper in the Indian
market. JKPs distribution network consist of 188 wholesalers, 10 depots & 4 regional marketing
offices, and 4,000 dealers It also exports branded copier paper to 35 countries.

Investment in technology and farmforestry improving margins: JKP had spent Rs. 1,775 crore
over FY12-14 to increase paper capacity by 1, 65,000 tpa, pulp capacity by 2, 15,000 tpa and to
modernized its paper plant in Odisha. Due to which consumption of pulp and energy has declined
sharply. JKP has also increased its focus on social farm forestry and has planted 17,536 hectares in
FY16 with over 1.44 lakh hectares till date and majority of the plantation being within a maximum
coverage of 200 km. These efforts has yielded results and in FY16 EBITDA margins expanded by 463
points YoY to 16.6% and company turned profitable after reporting losses for 2 years.

Higher wood supply in catchment area to lower raw material cost: Wood cost for JK paper
has reduced from 9,200/tons in Q3FY15 to INR 8,000/tonne in Q3FY16 (13% YoY lower) at Surat;
Gujarat and from 10,500/tonne in Q3FY15 at Orissa plant to ~9700/tonne (~8% YoY decline) in
Q3FY16 on increased supply of wood in the catchment area. The current wood price for the
company is hovering at 7,800/tonne for Surat plant and at 9,500/tonne for Orissa plant. The blended
wood cost for the company declined by ~5% to INR 9,100/tonne in Q3FY16. To counter scarcity of
wood, it has consistently increased area under farm forestry programme at 5 year average rate of
11,600 hectares (HA) annually over FY11-15 vs 6,000 hectares (HA) annually over FY06-10.Total
PE (x)hectares
EV/EBITDA
(x) productive
planted area under farm forestry programme increased to 1,32,929
of low
wastelands of tribals and farming community in the backward regions of Gujarat, Western
Maharashtra, Odisha and North Andhra Pradesh till FY15. During
FY15, 16,929 hectares of plantation were added of which ~86% in catchment area (within 200km)
and it I likely to another additional plantation of 18,000 hectares in FY16.

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Better technology plant and falling wood cost to improve margins: The paper industry has
seen significant increase in wood price by ~2x to 9,969/tonne in 2014 over FY11 while net sales
realization (NSR) of uncoated paper price increased merely by ~8% in the same period. Player with
old technology have seen severe dent in EBITDA margin from 18-20% in FY11 to 8-10% in FY14-15. In
contrast, TNPL, JK Paper, BILT and West coast maintained its EBITDA margin at 16-22% with
investment in technology. JK paper new integrated paper plant has advantage of consume lesser
coal (0.83 per MT of paper vs 1.79 of old technology). The new plant of JK paper can produce 1
tonne of paper with input of 0.785 tonne of pulp vs old plant of 0.858. The new plant also has
capability to extract more fibre vs old plant. Paper capacity expansion of 165K tonne and pulp of
215K tonne in FY14 with latest technology plant helped JK paper to improve its EBITDA margin from
6-9% in over FY13-14 to ~11% in FY15.EBITDA margin is likely to improve by 498bp YoY to 15.9% in
FY16 and by 115bp over FY16 to 17.1% in FY18E on operating leverage and lower raw material cost.
Wood cost for JK paper reduced from 9,200/tonne in Q3FY15 to INR 8,000/tonne in Q3FY16 (13%
YoY lower) at Surat; Gujarat and from 10,500/tonne in Q3FY15 at Orissa plant to ~9700/tonne (~8%
YoY decline) in Q3FY16 on higher supply of wood in the catchment area.

Outlook
India is rate as one of the fastest growing market for paper globally. The demand of paper has been
growing at around 8% for sometime and so far, the Growth of paper industry has mirrored the
growth in GDP and is expected to grow at 7% during the next year. However paper consumption is
poised for a big leap forward in sync with economic growth and would overtake GDP growth rate as
happened in other economies at a similar point in their growth trajectory. It is estimated to touch 20
million tons by 2020-21 and 25 Million tons by 2021-25.

Valuation
JK Paper is likely to report healthy earnings over FY17-18 on better realization and healthy volume
growth as the company can increase new plant capacity of 165K tonne by 10% without any capex.
We expect an EBITDA CAGR of ~28% over FY15-18E. We reiterate Buy; and raise TP to INR 73 from
INR 67 with a roll over to FY18E; based on a weighted average of 8.0x FY18E P/E and 5x FY18E (from
5.5x) EV/EBITDA.

Financial Performance
-------------- In Rs. Cr. ------------31-03-2016 31-03-2015 31-03-2014 31-03-2013
YEAR END
Equity Share Capital
148.53
136.62
136.62
136.62
Gross Block
3090.85
2988.92
3042.00
1511.74
Net Block
2291.84
2293.88
2465.19
767.63
Investments
34.62
28.02
95.58
15.05
Net Sales
2454.72
2158.83
1737.87
1459.11
Total Income
2450.17
2196.31
1793.50
1498.84
PBDIT
420.83
266.49
121.02
160.15
Interest
198.40
203.93
121.86
49.90
Profit Before Tax
115.12
-51.03
-122.94
37.34
Tax
35.56
-38.29
-45.75
-0.36
Earnings Per Share (Rs.)
5.36
-0.93
-5.65
2.76
Equity Dividend (%)
5.00
0.00
0.00
5.00
60.32
56.73
58.18
63.83
Book Value (Rs.)
Financial Ratios (%)
-------------- In Rs. Cr. ------------PBDIT Margin (%)
17.14
12.34
7.97
9.89
PBIT Margin (%)
12.77
7.08
0.94
4.90
PBT Margin (%)
4.68
-2.36
-7.07
2.55
Net Profit Margin (%)
3.24
-0.59
-4.44
2.58
Return on Networth /Equity (%)
8.87
0.00
0.00
4.32
Return on Capital Employed (%)
3.24
-0.51
-2.97
1.50
Return on Assets (%)
2.41
-0.38
-2.22
1.23
Total Debt/Equity (X)
1.75
2.38
2.40
1.84
Asset Turnover Ratio (%)
74.38
65.11
50.05
47.61
Enterprise Value (Cr.)
2180.60
2256.84
2306.68
1950.84
EV/EBITDA (X)
5.18
8.47
16.65
13.51