Paper cos to publish better Q1 nos, soaring demand brightens outlook

Paper cos to publish better Q1 nos, soaring demand brightens outlook (updated - 22 June 2010)
Current quarter earnings of most paper companies could turn out to be better-than-expected as these firms have been hiking prices for a while to offset rising input costs, say analysts tracking the sector. Since most Indian paper companies - unlike their peers in the West - are integrated, this will help them save on costs and improve operating margins, they said.

In the past three months, shares of leading paper firms like Ballarpur Industries, JK Paper, Pudumjee Pulp, West Coast Paper and Andhra Pradesh Paper have risen between 15% and 47%, as investors bet on better prospects for these companies.

Prices of pulp, a key raw material for making paper, have been rising in the international markets for the past few months. Analysts attribute this trend mainly to the earthquake in Chile - one of the largest producers of pulp - which disrupted 3 million tonne of pulp supplies, leading to pressure on supplies globally. Also, the US government’s decision to remove subsidy on pulp chemicals affected global sentiment, they say.

“I expect pulp prices to remain firm at their current higher levels for the rest of the year,” said Chintan Mewar, head-research, Finquest Securities.

“The per tonne cost of pulp in the US has gone from a low of $350 per tonne to the current level of $970 per tonne which is expected to increase further in the coming days,” he said.

Mr Mewar also added that this has led to a rise in paper prices in India by Rs 4,000-5,000 per tonne.

Industry experts say the domestic demand for paper has been growing 10-11% annually and the total production of paper has been 10 million tonnes as against the consumption of 12 million tonnes which leaves room for capacity addition.

“The current levels are clearly not sufficient to cater to the surging demand so companies will have to go in for expansion and add additional capacities to reduce the gap between rising demand and weakening supplies” said an analyst with a leading brokerage firm requesting anonymity.

Some companies have been raising prices since April. For instance, India’s largest paper producer, Ballarpur Industries raised the prices by Rs 3,000 per tonne in April followed by a Rs 2,000 hike in May and further raised them by Rs 1,000-1,500 in certain grades of paper in June.

“Some of the leading paper companies are currently available at attractive P/E multiples,” says said Ambareesh Baliga, vice-president, Karvy Stock Broking. “Investors can look forward to decent returns in the short term as they are likely to show good performance over the next few quarters,” he said.

Mr Baliga, however, feels there have been concerns over the long term prospects of the industry which may reflect in the share prices.
Source - Economic Times

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