Select paper companies see buying interest amid few good bets

Stock prices of select paper companies like West Coast Paper Mills, Tamil Nadu Newsprint, Star Paper Mills and Ruchira Papers hit fresh 52-week highs today on the National Stock Exchange. These stocks have gained 30-77 per cent in the last one year. The main interest in these stocks is is there are hardly any good paper stocks including the frontline ones or they are expensive. For example, Ballarpur Industries, largest paper manufacturer, is going through tough times.

Fitch Ratings downgraded the long-term issuer default ratings of the company to 'B-', from 'B+' and placed the ratings on rating watch negative in July end due to twin challenges of high leverage and weak liquidity. International Paper APPM’s revenue came in flat in FY16 and the company has weakest operating margin among frontline players. Stock prices of Ballarpur and International Paper are down 17 per cent and 21 per cent respectively in the last one year.

Another reason for interest in the above stocks is due to value buying opportunity as many mid and small cap companies rallied in the past one year. While benchmark Nifty 50 has gained 8.6 per cent year to date in 2016, Nifty 500 has outperformed with 9.5 per cent return. Companies like Ballarpur Industries, International Paper APPM and Tamil Nadu Newsprint and Papers are part of Nifty 500 index. JK Paper and Seshasayee Paper have gained 40-100 per cent.

Lastly, demand for paper has been mirroring the growth in India’s gross domestic product and has been more than supply according to Centrum Wealth Research. “From FY12-15 domestic demand register a CAGR of 8 per cent as compared to a 6 per cent increase in production. The operating capacity of the industry currently stands at around 13 MT. During 2015-16, domestic production is estimated to be 12.2 MT,” said Abdulkader Puranwala and Siddhartha Khemka from Centrum Wealth Research.

However, Fitch has a contradictory view. “Global paper prices have remained weak over the last three years reflecting the lower demand globally. Demand has been falling in the developed markets of North America and Europe, while growth in emerging markets, such as India and China, has been weak over the past few years and unable to offset the demand decline in developed markets,” it said.

Thus amid a challenging scenario, West Coast and Tamil Nadu Newsprint are gaining momentum and are better bets in the paper space. The companies have healthy operating margins and comfortable interest coverage ratio than others despite slightly higher debt to equity ratio in the range of 1.5-1.7 times.

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