Buy JK Paper Results in line with estimates: Target Price: Rs 84:; Emkay

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JK Paper

Results in line with estimates

BUY

CMP: Rs 53                                       Target Price: Rs 84

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n     Q3FY11 results were in line with estimates with revenue growth of 18% yoy (8% volume and 10% realisations) to Rs 3.1 bn and PAT growth of 23% yoy to Rs 251 mn

n     EBITDA margins contraction of 200 bps yoy to 20.8% is attributed to high input (wood) cost due to adverse monsoon, however the same is expected to improve by Q4FY11

n     Company revised its capex to Rs 16.5 bn (previously Rs 15 bn) due to upwards revision in planned capacity - funding for capex plans is tied up

n     Valuations remain compelling at FY12E P/E of 3.8x, EV/EBITDA of 3.2x and 40% discount to book value. We re-iterate BUY

18% revenue growth driven by 8% growth in volumes and 10% in

realisations

JK Paper’s Q3FY11 revenues increased by 18% yoy to Rs 3.1 bn which was in line with

our estimates of Rs 3.1 bn. Revenue growth is supported by 8% yoy increase in

volumes (to 68,300 mt) while average realisations increased by 9.6% yoy to Rs 45,950 /

mt. Volume growth is supported by strong demand in its packaging board segment and

higher capacity utilisation. Overall capacity utilization (ex pulp production for internal

transfer) of paper notched up to 111% with total paper production of 66,600 mt.

EBITDA margins contracted by 200 bps to 20.8% due to rising input cost

Q3FY11 results witnessed EBITDA margins contraction of 200 bps yoy / 180 bps qoq to

20.8% (below our estimates of 21.5%) due to pressure on raw material. Adverse

monsoon during the quarter disrupted wood supply and also affected coal availability.

However the same has resumed by the end of the quarter. Prevailing pulp prices have

also declined by 5% to US$ 680 / mt (from US$ 705 / mt in Q3FY11) which should

support margins. With paper prices remains buoyant at current levels, management is

confident about regaining its EBITDA margins.

PAT growth of 23% is in line with estimates

Driven by revenue growth, EBITDA increased by 8% yoy to Rs 654 mn (we estimated

Rs 656 mn). With interest and depreciation inline with estimates, APAT increased by

23% yoy to Rs 251 mn as against our expectation of Rs 250 mn. AEPS for the quarter

stood at Rs 3.2 vs 2.6 previous year.

Revise capex for higher capacity, maintain BUY

Management outlook on paper realisations remains encouraging driven by strong

domestic demand. However ongoing capex of Rs 200 mn - expected to add 20,000 mt

to its packaging board capacity (current 60,000 mt) - should drive volume growth for

FY12 by ~8%. The company has revised its capex plan for FY13 from Rs 15 bn to Rs

16.5 bn due to increase in planned capacity. The board has also declared an interim

dividend of Rs 2.25 per share. The company continues to trade at compelling valuations

of 3.8x FY12 EPS and EV/EBITDA of 3.2x with 40% discount to book value. We

maintain our BUY recommendation on the stock.

Funding tied up for its Rs 16.5 bn capex

The company has revised its capex plans from previous Rs 15 bn to Rs 16.5 bn on account

of higher capacity additions. The company has plans to put pulp plant of 215 thousand mt

(previously 200 thousand mt) and paper plant of 165 thousand mt (previously 150 thousand

mt) and captive power plant of 65 MW (previous 35 MW).

Its funding plans include Rs 2 bn through FCCB (management indicated that it has been

tied up), Rs 2.5 bn through rights issue, Rs 1.5 bn through internal accruals and balance Rs

10.5 bn through debt. The capex is expected to commission by Q4FY13.