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Strong leadership position and consistently improving operating efficiency a major plus: The company estimated their market share in copier market at ~23% (largest in the industry), coated paper market at ~12% and packaging board market at ~11%. Following which the company acquired the SPML with an annual capacity of 136,000 TPA and there is significant capex which is currently undergoing would help the company in gaining incremental market share and outgrow the industry. Further, over the last few years, the company has showcased a robust operating level performance and as consistent improvement.
Strong balance sheet to provide cushion for future growth and expansion: As on December 31, 2019, the company’s total borrowings stood at Rs.1,423.4 cr including the long term debt of Rs.1,338.7 cr. The total debt-equity ratio stood at 0.6x. The company has been able to improve their working capital management tremendously over the last few years. The cash conversion cycle has improved from 53 days in FY17 to 25 days in FY19 as the inventory days and debtor days came down from 94 and 15 to 78 and 8, respectively. Meanwhile, the EBITDA margins showcased a firm uptrend – from 12.0% (FY15)-16.2% (FY16)-19.7% (FY17)- 21.7% (FY18)- 26.7% (FY19)- 29.9% (9M FY20). Driven by solid operating level performance, the interest coverage ratio has consistently improved from less than 1 at 0.7x in FY15 to 6.0x in FY19 and 9M FY20.
Low consumption of paper and move from plastic to benefit: As per the industry reports, there is extreme under-consumption of Paper in India – we consume just ~13 Kgs per capita as against the global average of ~57 Kgs per capita. However, paper consumption in India is rising rapidly on account of increasing income, rising aspirations and literacy, and, product consumption. Further, any ban on plastic would work in favor of the company for its growing and expanding packaging board segment.
OUTLOOK & VALUATION
The global economy is currently facing unprecedented challenges on account of Corona Virus outbreak. The lockdowns and shutdowns are likely to significantly impact the demand and supply across the industries including paper and paper products. During this phase of uncertainty, it is impossible to ascertain the impact in the short to medium run. However, considering the leadership position of JK Paper and growth prospects of Indian paper industry in the long run, along with, the assumption that the production halts are not extended, we arrive at the following estimates (which may change going forward with the future developments). Going forward, we expect the company to deliver an EPS of Rs.30.1 in FY22; assigning a target multiple of 5x, we arrive at a target price of Rs.151 showcasing an upside potential of 108% from current levels with an investment horizon of 18-24 months.
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