Initiating Coverage : JK Paper Limited - Buy - TP Rs.200 - Kotak

- JK Paper (JK) will benefit strongly from a) surge in global pulp prices due to ban on imports of waste paper in China and low dependence of company on imported raw material compared to domestic peers, b) In-house pulp manufacturing and focus on farm forestry for raw material procurement likely to support margins, c) Acquisition of Sirpur unit and a brownfield capacity expansion in Gujarat will increase overall capacity by ~338KT/74% and d) imposition of anti-dumping duty on uncoated paper further supports profitability of domestic companies while investigation for coated papers is under process. Indian paper industry is expected to grow at a CAGR of 6.6% over the next 3-4 years. With the acquisition of Sirpur unit, we believe JK Paper will gain market share in the coming years and also help the company to supplement its product portfolio. Operating margins is expected to improve by 400 bps YoY in FY19E to 25.5% and likely to remain in the range of 24-25% in the near term. PAT is expected to register CAGR of ~16% during FY18-FY21E period. At CMP stock is trading at 6.9x/6.8x/6.9x FY19E/20E/21E earnings. We initiate coverage with a BUY rating and a target price of Rs.200.

Risks & Concerns

i) Significant capacity additions by domestic paper producers may result in increased supply in domestic markets (We believe, any fresh expansion either brownfield or greenfield would take 3-4 years to come on stream);

ii) Increase in crude prices, unavailability of water may lead to increase in cost of production;

iii) Slowdown in paper industry may result in underutilization of capacity

Shares of JK PAPER LTD. was last trading in BSE at Rs.155.4 as compared to the previous close of Rs. 158.4. The total number of shares traded during the day was 116117 in over 1261 trades.

The stock hit an intraday high of Rs. 160.4 and intraday low of 154.7. The net turnover during the day was Rs. 18199929.

Source : Equity Bulls

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