Paper stocks see strong investor interest as biz cycle turns favourable

 Improving demand and likely consolidation in the industry are key triggers

The paper industry has seen a recent surge of investment interest. Part of this is a natural consequence of investments in the packaging industry, which is doing well. Investors expect the paper cycle to also remain strong as a result.

However, unlike in the packaging sector, the financial position is less clear in the paper industry. Approximately 20-25 per cent of the revenues of the paper industry are generated by listed companies, with the rest coming from smaller mills.

In Q4, 2020-21, a sample of 21 listed companies saw their revenues up 16 per cent year-on-year at Rs 5,244 crore versus Rs 4,520 crore in Q4, 2019-20. Operating Profits were up 19 per cent YoY at Rs 949 crore vs Rs 797 crore a year ago. Profits after tax were down 5 per cent at Rs 427 crore versus Rs 450 crore. Tax paid was up 241 per cent at Rs 156 crore versus Rs 46 crore. Financing and interest costs were down 29 per cent at Rs 115 crore.

The higher revenues are a good sign but this hasn’t translated into profits. The industry had to cope with demand destruction in some segments due to schools and colleges being shut down. It also had to survive supply chain issues apart from coping with production during lockdowns, so this is actually a decent performance.

In the last fiscal, supply of waste paper for recycling dried up due to lack of transport facilities with the shipping industry hit by global lockdowns. China also became a big buyer of waste paper and pulp, pre-empting supply to Indian mills.

India depends on waste paper pulp imports for close to 65 per cent of all raw material supply. This is especially important for the packaging industry. This is due to the fact that the US/ Europe have per capita paper consumptions of about 55-60 Kg/ year versus India’s per capita consumption of 15 Kgs.