Increasing domestic fund flows are expected to find way into these stocks
August 21, 2015
Considering the rich valuations of stocks in several sectors, investors seem to have turned to paper-producing companies, which were market laggards over the past five years. Investors and traders are seeking comfort in the low valuations of these stocks. In addition, increasing domestic fund flows are expected to find way into these stocks.
“Companies are working on rationalising costs and the demand situation is also improving gradually. Next two-three years should be good for the industry,” said a veteran broker.
“Writing and printing paper demand is growing at 5-6 per cent, while packaging industry is growing in excess of 10 per cent. On the raw material side, the pulp prices have remained steady ,” said George Thomas, marketing head of Tamil Nadu Newsprint (TNPL).With new capacity coming in the end of this year, TNPL will become the second largest packing paper manufacturer after ITC.Other major players in the paper packaging, paper manufacturers include Century, Emami, JK Paper and Westcoast Paper.
Demand in the writing and printing paper is also slightly better than last year, according to ML Pachisia of Orient Paper.
The industry on average is operating at a capacity utilisation of 70-75 per cent, and with the improving capacity utilisation, margins should improve. Stocks of companies such as TNPL, Westcoast, Ballarpur Industries, JK Paper and Ruchira Paper have risen sharply over the last few days, but are still available at low valuations. (See table for details).
While low-valuations-with-a-moderate growth outlook is a positive, one negative could be the falling rupee which could lead to high pulp (raw material) prices. Also, one should note that traditionally paper firms have traded at low multiples and are only cheap relative to other industries.