JK Paper (Buy)
We believe that a) the company’s focus on increasing farm forestry to fulfil its raw material requirements will help in reducing raw material costs and improve margins; b) ramping up of Sirpur unit; and c) capacity expansion at Gujarat will help the company to gain market share augurs well for the company. In addition, the effective implementation of single use plastic ban with effect from October 2, can bring additional demand for the packaging board segment.
Demand growth is expected to remain muted in 2QFY20 and foresee improvement from 3QFY20 onwards. However, lower realisation and weak performance at Sirpur, would negate the benefit. Hence, we expect the earnings to remain largely flat for the next two years, ie, ₹430 crore and ₹440 crore for FY20E and FY21E, respectively.
At CMP, the stock is trading at around 4.1/4.1x FY 20/21E earnings, which is at discount to its last four years historical multiple of 6X. We maintain our BUY rating on the stock with an unchanged target price of ₹170.