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Waste paper shortage led sharp price push

Waste paper shortage has created a once in a lifetime situation wherein prices of recycled papers manufactured by Grade B/C mills surpassed that of papers manufactured using wood pulp by Grade A mills. Waste paper, a key RM for recycled paper, has shot up significantly in last few months led by lower collections. Pandemic led many offices, courts and schools to remain shut for a very long period of time. As a result collections remained very low. To add to misery EU banned exports of waste paper in Oct’21. With demand now back to normal and severe shortage of waste paper, Grade B/C mills took sharp price hikes few months back. To remain at premium to recycled papers, Grade A mills’ paper too took price hikes even though their RM prices have remained stable. Grade A mills such as JK Paper, West Coast Paper and Andhra Paper are completely backward integrated and use wood pulp as a key RM. Hence compared to Grade B/C mills, there cost have not gone up significantly. With demand now crossing pre-COVID levels and favourable pricing scenario for Grade A mills, we expect significant improvement in profitability for JK Paper, West Coast Paper and Andhra Paper over coming few quarters

Current situation an anomaly in last 40 years

There has never been a situation in last 40 years when recycled paper (manufactured by Grade B/C mills) prices have been more than Grade A mills' paper. The raw materials required by Grade B/C mills is either waste paper or agro products (Bagasse and what straw). Grade B/C mills make up ~60-65% of India’s total production capacity with waste paper being the preferred RM. With severe shortage of waste paper, pricing of recycled paper inched to Rs60-65/kg vs. Rs50/kg in pre-pandemic times. The prices continue to remain on inclining trend. To remain on par/premium to recycled papers, Grade A mills too have taken price hikes. As per our channel checks atleast two hikes were taken in last two months (6-7% each) and with one more expected to come by end of March or early April (another 6-7%). As per the distributors this situation is expected to last atleast till MayJune’22.

Price hikes across all the product categories

Wholesale prices of Writing & Printing (W&P) paper have increased from Rs39-46/kg to Rs75-80/kg over the last one year. Coated paper prices are up 40% to Rs100/kg while craft paper and board prices have increased from Rs31-3/kg to Rs27-44/kg over the same time frame. Prices of news print paper, which largely uses recycled paper, have registered the biggest price movement from Rs37/kg to Rs85/kg.

Price hikes by Grade B/C mills more than Grade A mills

Coal, chemical, transportation cost have increased for all the mills. However, in case of Grade B/C mills RM cost has gone up significantly due to supply shortage of waste paper. However, Grade A mills largely use wood pulp as a RM and are fully backward integrated. Hence the impact of RM inflation is relatively low for them. As a result, prices hikes taken by Grade B/C mills have been significantly more than companies such as JK Paper, West Coast Paper and Andhra Paper. West Coast has increased prices by Rs3.5-4k/tn in March (previous hike was in Feb'22) and another Rs4k/tn hike expected to be in effect by March end or April first week. Paper prices for West Coast are expected to reach to Rs75-80/kg by April’22 from current price of Rs65-66/kg.

Demand uptick, restocking of inventories and favourable pricing

With impact of pandemic receding schools, colleges, offices and courts have opened up full-fledged. With uptick in demand, distributors have started stocking inventory. Also, inflationary trend has led to higher than normal demand at distributor level. Thus, the troika of demand normalization, higher level of demand at channels and favourable pricing has created a happy scenario for likes of JK, West Coast and Andhra Paper. Windfall gains can be expected for these companies over next couple of quarters as per our channel checks.

Valuations remain favourable

JK Paper is currently trading at 7.5x EV/EBITDA while West Coast Paper and Andhra Paper are trading at 3.9x and 4x of trailing EBITDA. Debt/Equity of all three companies stands at 1.2x/0.5x/0.1x.

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