J K Paper Ltd (JKPL) was incorporated in 1992 in Rayagada Orissa to manufacture Paper and Paper products. It is a pioneer in manufacturing and marketing of paper. Its flagship brands include JK Copier, JK Easy Copier, JK Evervite, JK Excel Bond, JK Bond, JK SHB Maplitho, CPM Parchment and JK MICR.

It has two integrated pulp and paper plants - JK Paper Mill in Rayagada (Orissa) with an annual output of over 100,000 tons and Central Pulp Mills in Sonagadh (Gujarat) of 50,000 tons per annum capacity. Both the manufacturing units of the company are ISO 9001-2000 complaint.

Key Highlights

• Producing world class coated packaging board for high end packaging.

• Copiers and coated papers are the fastest growing segments, at an annualized rate of 15-20 %, while high-quality packaging boards is growing at about 12%. In the previous two years, company has added additional capacity of 60,000 MT in this segment.

• Company is going for backward integration by providing farmers high quality plant species.

• There is an expectation of an increase in paper prices by 2000-2500 per ton; this will further improve profitability of the company.

Future Outlook

At a current market price of Rs55, the stock is available at P/E of 4.7x of its FY10E earnings, and 4.4x of its FY11E earnings. We recommend BUY with a target price of Rs71.5, since company’s future shows potential.

JK Paper Ltd (formerly known as Central Pulp Mills) is a part of well known group of JK Organization. It is India’s largest producer of branded papers and a leading player in the Fine Papers and Packaging Board Segments. Company has the competitive advantage of location in respect of raw material as it sources all its bamboo requirements within the 200 km radius of the plant. Further they are running social forestry and farm forestry programs in 11 districts of Orissa and 3 districts of Andhra Pradesh, covering a total area of over 20,000 Hectare. This benefits the company in the long term for continuous procurement of raw materials. It is the first Indian integrated paper Company which was awarded the TPM excellence award. The company is a pioneer in transforming paper from a commodity market into a branded market by introducing a series of value added products, which currently accounts for over 90% of company’s total sales. It has also entered into the high-end Packaging Board market. At present, JK Paper has a strong footing in all the fast

BUSINESS SEGMENT:

Business Communication Papers: It covers the high-end office paper segment. 'JK Copier' continues to maintain its leadership position in this segment while 'Easy Copier' and 'Sparkle' are also performing well. Barring the previous year, compounded growth in this segment in the four years before has been more than 20%. Recently, company has introduced new product "Cedar" – a high quality paper for use in colour printers and for making corporate presentations.

UnCoated Paper & Board:

In this segment, Maplitho Paper has shown superior performance. Other products such as JK Evervite and JK MICR Cheque Paper have also performed well.

Coated Paper & Board:

There is a wide range of products in this segment like JK Cote and JK Eco Cote. CAGR is more than 15% in this segment.

Packaging Board:

This segment caters to wide range of high-end coated packaging boards like JK Tuffcote, JK Ultima, JK Purefil base, JK TuffPac, JK IV Board etc. This segment is expanding at a CAGR of more than 15%.

Stationery:

Company is also exploring the stationery segment by offering products like JK Vista, JK Excel and various other products.

Outsourcing:

Company is also increasingly exploring opportunities for outsourcing by importing products and selling them under their JK brand name.

CAPACITY EXPANSION PLANS:

Company is planning to invest Rs. 1500 crores in the next two years to expand its annual capacity to 400,000 tonnes. They will set up a 200,000-tonne pulp mill and enhance captive power production to 55 mega watt from 35 mega watt. Construction of its Orissa plant is expected to begin in October and would be completed in 2012.

The company is a market leader in some segments in the Indian paper industry. The company has been able to maintain operating margin of over 22% in the 9 months of FY10, near to its competitors. With the emphasis on backward integration the operating margins will improve further. Company has a lower P/E ratio of 5.49 as compared to its peers. So, it is at attractive valuation at these levels.

During Q3FY10, JK Paper has reported a decline in sales by 7% on Y-O-Y basis to Rs 265 cr as against the same quarter in the previous year. But the operating profit of the company increased tremendously by 8% to Rs. 60.75 in the Q3FY10 crore as against Rs. 41.43 crore in the Q3FY10 of previous year. Increment is as a result of savings in cost of power, fuel and oil and increase in efficiency. The net profit of the company jumped from Rs. 3.57 crore in the Q3FY09 of previous year to Rs. 20.35 crore in the Q3FY10 of current year, surge of 470%.

However on Q-o-Q basis, company’s operating margin increased by 1% to 23% and net profit margin remained stagnant at 8%.

Net Sales of the company during the year 2008-09 were Rs. 1200.5 crore. Net profit (PAT) was affected due to higher interest and depreciation charges for the full year on Company's new packaging board plant and substantially higher tax provisions. The increased depreciation and rise in the interest cost of the company has led to a subdued bottom-line performance of the company for the last few years. However, company is consistently reducing its operating cost through capacity expansions by installing efficient technologies.

India is the fastest growing market for paper globally. From the last few years, the Indian Paper Industry has grown at an average rate of 6-7% whereas the paper market in developed countries has been stagnant at 2%. During the period 2002-07, newsprint, writing & printing, containerboard, cartonboard and others registered growth of 13%, 5%, 11%, 9% and 1% respectively.

The Indian Paper Industry accounts for about 1.6% of the world’s production of paper and paperboard. The estimated turnover of the industry is Rs 25,000 crore (USD 5.95 billion) approximately. The industry provides employment to more than 1.2 lakh people directly and 3.4 lakh people indirectly. The industry was delicensed effective from July, 1997 by the Government of India.

For manufacturing of paper, 35% of chemical pulp, 44% of recycled fibre and 21% of agro-residues is used. As per industry estimates, paper production is likely to grow at a CAGR of 8.4% while paper consumption is expected to grow at a CAGR of 9% till 2012-13. The import of pulp & paper products is likely to show a growing trend.

Foreign funds interest in the Indian paper sector is also growing. IFC, the investment arm of World Bank is already associated with at least three of the IPMA member mills.

Demand for paper products like tissue paper, tea bags, filter paper, light weight online coated paper and medical grade coated paper, etc. is growing. These developments are expected to give fillip to the industry. Current consumption of Paper is at 8.50 million tonnes a year. The Paper industry is expected to grow to10 million tonnes by 2010 and to 15 million tonnes by 2015.

Factors favoring growth are increased spending on education, higher literacy levels, improved standards of living, a booming retail sector etc.

The future growth is dependent upon imported market pulp due to serious shortage of wood in the country. Strengthening of Indian rupee is favoring the paper manufacturers as they can import the raw material at lower prices.

COMPANY:
JK Paper is India’s largest producer of branded papers and a leading player in the fine papers and packaging board segments. JK Paper is well known for its obsession for quality and customer focus. They also have a strong commitment towards environment as they are striving continuously to reduce the intake of natural resources by implementing various Clean Development Mechanism

(CDM) Projects. They have set up various plants for minimizing water consumption, rain water harvesting, minimizing waste water discharge and reduction in power and steam consumption and Lime Kiln plant to regenerate lime from lime sludge.

Sustained supply of quality raw material at affordable prices is a key determinant for the Company to operate efficiently and achieve cost competitiveness. It is the first Indian integrated paper Company to be awarded the TPM excellence award - First Category by the Japan Institute of Plant Maintenance.

It has a large distribution network and has further widened it with selection of additional distributors for packaging board and stationery products.

The company with brands like JK Copier, JK Copier Plus, JK Easy Copier, Sparkle and Cedar is the largest copier manufacturer in India and has an established presence in all the sub-segments of the markets.

It has also raised funds through FCCBs at a coupon rate of 1.25% with a conversion price of Rs 95 per share which is to be due in 2011.

• Company will set up new pulp mill of 2,00,000 tons per annum and paper capacity of 150,000 tons per annum at its Orissa unit. The project is likely to be commissioned in the second half of 2012. This would give substantial returns in the long term and add to its profitability.

• During the year, company's new Packaging Board plant completed its first full year of operation. They have achieved an overall 106% capacity utilization. It ranks second in the packaging board segment with over 24% market share.

• Company is reducing dependence on raw material by harvesting its own tree plants. Procurement of woods from farm forestry sources now accounts for over 65% of the company's total raw materials consumption. Thus, sustained supply of quality raw material at affordable prices is a key determinant which improves its operating efficiency and achieving cost competitiveness in the industry.

• They are also working on several energy and water conservation initiatives with the active cooperation and help from International Finance Corporation. They have established Lime Kilns in both the manufacturing units that will be fully operational soon. These initiatives would substantially reduce the company’s operating expenses.

• JKPL has good export footprint for high value branded products in the Middle East, South East Asia, SAARC and various African countries.

• On account of lower raw material costs and lesser interest burden this year, net profits are expected to go up by 136% in FY10 over FY09. Though revenues for FY10 are expected to be more or less same as last year, its proposed expansion plans would help JKPL grow revenues from FY11 onwards.