Initiating Coverage % Chg 20-Dec 1 Day 1 Mth 3 Mths Indian Indices SENSEX Index 36,265 (0.6) 3.0 (1.6) NIFTY Index 10,952 (0.1) 3.3 (1.7) NSEBANK Index 27,275 (0.1) 3.9 6.6 NIFTY 500 Index 9,234 (0.1) 3.3 (2.0) CNXMcap Index 17,989 0.1 2.8 (2.0) BSESMCAP Index 14,782 0.1 2.5 (6.2) World Indices Dow Jones 22,860 (2.0) (6.6) (14.5) Nasdaq 6,528 (1.6) (6.4) (18.3) FTSE 6,712 (0.8) (4.8) (10.4) NIKKEI 20,393 (2.8) (6.5) (15.7) Hangseng 20,393 (2.8) (6.5) (15.7) Shanghai 25,624 (0.9) (2.3) (9.3) Value traded (Rs cr) Cash BSE 20-Dec 2,318 % Chg Day (20.9) Cash NSE 30,816 (13.0) Derivatives NA NA Net inflows (Rs cr) 18-Dec MTD YTD FII 1,016 3,594 (32,868) Mutual Fund (410) 824 118,363 Nifty Gainers & Losers Price Chg Vol 20-Dec (Rs) (%) (mn) Gainers YES BANK LTD 187 4.0 8.0 HINDUSTAN PE 244 3.5 1.9 BHARAT PETRO 371 2.6 3.5 Losers GRASIM INDS 829 (3.1) 4.3 STATE BANK I 294 (2.2) 1.2 WIPRO LTD 333 (2.2) 4.0 Advances / Declines (BSE) 20-Dec A B T Total % total Advances 211 456 50 717 100 Declines 217 544 61 822 115 Unchanged 3 26 20 49 7 Commodity % Chg 20-Dec 1 Day 1 Mth 3 Mths Crude (US$/BBL) 56.4 0.3 (15.5) (28.9) Gold (US$/OZ) 1,249.4 0.3 2.2 3.9 Silver (US$/OZ) 14.6 (0.2) 1.7 3.0 Debt / forex market 20-Dec 1 Day 1 Mth 3 Mths 10 yr G-Sec yield % 7.3 7.5 7.8 8.1 Re/US$ 70.4 71.6 71.7 73.0 Nifty 11,900 11,400 10,900 10,400 9,900 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 News Highlights The total external commercial borrowings (ECB) will now be rule-based and will be capped at 6.5 per cent of the gross domestic product, the central bank said in a statement. The limit now works out to be about $160 bn for the current fiscal year, against the actual outstanding of $126.29 bn as on September 30. The central bank already has a rule-based exposure for foreign investors exposure in bonds. Foreigners are allowed to invest up to 6 per cent of the outstanding debt. (BS) India is considering building emergency stockpiles of natural gas, on the lines of strategic oil reserves, to deal with supply disruption amid the country s growing dependence on fuel and its import. (ET) To ease their cash crunch, Govt to put in Rs 830 bn in public sector banks. The fresh dose of capital will be given to enable banks to meet regulatory norms, allow better-performing PCA banks to achieve 9 per cent capital adequacy ratio, strengthen merging banks such as the recently merged Bank of Baroda-Vijaya Bank-Dena Bank combine and prevent non-pca banks, such as Punjab National Bank, that are on the borderline from coming into the framework. (IE) NHPC said its offer to buy back 214.2 mn equity shares at Rs 28 apiece, aggregating to Rs 6 bn, will open on January 1. The share repurchase programme will close on January 14, 2019, the hydro power giant said in a regulatory filing. (BS) Bosch will suspend manufacturing operations at the company s Bidadi plant in Karnataka on December 28 and 29, 2018. (MC) Bharti Airtel has formed 'special committee of directors to evaluate fundraising options. The company has approved the sale of up to 590 mn shares of Bharti Infratel to Nettle Infra. (MC) Vedanta Group company Sterlite Copper says it expects to re-start its copper plant at Thoothukudi in southern Tamil Nadu (600 km from here) in the next two months, subject to various clearances and procedures. The unit has been shut since March 27, first for maintenance and then due to orders from the Tamil Nadu Pollution Control Board (TNPCB). (BS) Indian Hume Pipe received Letter of Acceptance for the work of Rs 5.03 Bn from Andhra Pradesh Drinking Water Supply Corporation (APDWSC). (MC) PFC Board approved to purchase Government of India's entire shareholding in REC. (MC) Infrastructure Leasing & Financial Services (IL&FS) Group said that it has started a process to sell its stake in education and in alternative investment management businesses. (BS) Elecon Engineering approved raising upto Rs 1.5 Bn via NCDs. (MC) With founders of Mindtree not willing to sell their stakes, the firm's single largest investor, V G Siddhartha, is likely to offload his stake in the stock exchanges through bulk deals. (BS) Infosys appointed Nilanjan Roy as CFO with effect from March 1, 2019. (MC) What s Inside Initiating Coverage JK Paper Limited Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, IE = Indian Express, BL = Business Line, BQ = BloombergQuint, ToI: Times of India, BSE = Bombay Stock Exchange, MC = Moneycontrol Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
Initiating Coverage Stock Details Market cap (Rs mn) : 28154 52-wk Hi/Lo (Rs) : 194 / 97 Face Value (Rs) : 10 3M Avg. daily vol (Nos) : 1,430,366 Shares o/s (mn) : 178 Financial Summary Y/E Mar (Rs mn) FY18 FY19E FY20E Sales 28,775 32,495 33,102 Growth (%) 4 13 2 EBITDA 6,183 8,288 8,320 EBITDA Margin (%) 21.5 25.5 25.1 Net profit 2,605 4,082 4,088 EPS (Rs) 14.8 22.9 22.9 Growth (%) 32.7 54.3 0.1 BVPS (Rs) 93.8 112.4 131.9 DPS (Rs) 1.7 3.4 3.4 ROE (%) 15.83 20.38 17.40 ROCE (%) 18.41 22.65 19.68 P/E (x) 10.7 6.9 6.9 EV/EBITDA (x) 5.66 4.40 4.50 P/BV (x) 1.7 1.4 1.2 Source: Company, Kotak Securities - PCG Shareholding Pattern (%) (%) Sep-18 Jun-18 Mar-18 Promoters 48.4 48.4 49.2 FII 8.5 6.9 6.6 DII 2.4 7.9 6.6 Others 40.7 36.8 37.7 Source: Company Price Performance (%) (%) 1M 3M 6M JK Paper Ltd (4.8) (5.3) 37.0 Nifty 2.8 (2.5) 1.7 Price chart (Rs) 200 175 150 125 100 Dec-17 Apr-18 Aug-18 Dec-18 Jatin Damania jatin.damania@kotak.com +91 22 6218 6440 Deval Shah deval.shah@kotak.com +91 22 6218 6423 JK PAPER LIMITED PRICE RS. 158 TARGET RS. 200 BUY 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. Investment argument Backward Integration and focus on farm forestry to support margin: We believe that JK Paper is in a sweet spot due to a) increased domestic sourcing of wood, b) weak domestic prices of wood and c) rising global pulp prices thereby increasing cost curve. JK Paper enjoys operating efficiencies because of its integrated production capacities, as a significant portion of wood pulp (pulp capacity of 276,000 TPA) and power requirements (80 MW) are met through captive production. Further, to reduce its dependency on third party for raw material sourcing, the company is running social forestry and farm forestry in Orissa, Gujarat, Maharashtra and Andhra Pradesh, covering a total area of 1,50,000 hectares, which helps them to source ~52% of total raw material consumption. Further reclassification of bamboo from forest produce to non-forest produce in Nov, 2017 shall increase the wood supply in the domestic market over the long run and will eventually benefit the local companies. Besides this, JK Paper is also focused on sourcing 71% of its raw material requirement from within a radius of 200 kms which results in reduced logistics cost. Given the captive procurement (52%) of raw materials and lower logistic costs, we expect operating margins to expand by 400bps in FY19E and likely to remain in the range of 24-25% in FY20E and FY21E (from 21.5% in FY18). The expansion in margins is also supported by increase in average realization in a rising global cost curve scenario. We expect realization to remain firm for FY20 and FY21. Strong market position with presence in high quality brands: JK Paper is a leader in India's copier paper segment with a market share of 23%, the second-largest in the coated paper segment (market share of 12%) and a leading player in the packaging board segment, having market share of 11%. Its presence in copier paper, coated paper and flexible board are relatively less fragmented compared to paper industry. We believe, JK Paper s position will further strengthen in terms of product offerings and help the company to gain market share with the operation of Sirpur unit (starting FY20E) and completion of brownfield expansion plan of 200,000 tonnes in Gujarat. Besides this, the strong marketing and distribution policies assure the company on faster product reach and better connect with the market. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2
Sirpur Acquisition to add ~30% capacity: JK Paper had shown interest in multiple assets, but due to disagreements on valuations, deal didn t materialize. This shows, management s conservative approach. Finally, JK Paper was successful in acquiring Sirpur Paper mill with an installed capacity of ~138KT (~30% of JK current capacity) by infusing Rs3.71 bn, post NCLT approval. This consists of a cash payment of Rs1.66 bn and issue of equity shares of Rs430 mn and preference shares of Rs1.62 bn. The management expects this plant to be fully operational in Q1FY20E. We believe, this acquisition will be EPS accretive to the company, supported by subsidies given by Telangana government, in terms of wood, coal and electricity duty. Imposition of anti-dumping duty to boost profitability: The Government recently imposed anti-dumping duty (ADD) on certain kinds of uncoated paper from Indonesia, Thailand and Singapore for the period of three years to protect interest of domestic companies. The duty currently stands at difference between the landed value of the product and USD855/tonne. We expect, JK Paper to gain on the imposition of anti-dumping, as company s uncoated printing and writing paper capacity stands at 292KT (third largest). ADD will be beneficial to the paper industry in a falling realization scenario. Outlook JK Paper is a leader in India's copier paper segment, the second-largest in the coated paper segment and a leading player in the packaging board segment. We believe that, given the high cost curve globally and benefit of Sirpur paper mill to start accruing from 1QFY20E onwards, JK Paper growth rate is likely to be higher than the market and will also help the company to gain the market share. Besides this, the company s focus on increasing farm forestry to fulfill its raw material requirements and capacity expansion at Gujarat, augurs well for the company. At CMP, the stock trades at 6.8x/6.9x FY20E/21E earnings. We initiate coverage on stock with BUY rating and a target price of Rs.200, valuing on SoTP basis. Valuing standalone operations at 8x FY20E earnings (25% discount to its 10 years average) and Rs18 from Sirpur operation. Key Risks: 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 Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 3
Financials: Standalone Profit and Loss Statement (Rs mn) Revenues 28,775 32,495 33,102 34,392 % change YoY 4.1 12.9 1.9 3.9 EBITDA 6,183 8,288 8,320 8,486 % change YoY 19.6 34.1 0.4 2.0 Other income 225 280 290 290 Depreciation 1,223 1,223 1,245 1,270 EBIT 5,184 7,346 7,365 7,506 % change YoY 20.2 41.7 0.3 1.9 Net interest 1,430 1,253 1,263 1,443 Profit before tax 3,754 6,093 6,102 6,064 % change YoY 54.2 62.3 0.1-0.6 Tax 1,149 2,011 2,014 2,001 as % of PBT 30.6 33.0 33.0 33.0 Profit after tax 2,605 4,082 4,088 4,063 Exceptional item 0 0 0 0 Net income 2,605 4,082 4,088 4,063 % change YoY 49.3 56.7 0.1-0.6 Shares outstanding (mn) 175.5 178.2 178.2 178.2 EPS (reported) (Rs.) 14.8 22.9 22.9 22.8 CEPS (Rs.) 21.8 29.8 29.9 29.9 DPS (Rs.) 1.7 3.4 3.4 3.4 Balance sheet (Rs mn) Cash and cash equivalents 2,506 1,628 2,136 668 Accounts receivable 1,092 1,246 1,270 1,319 Inventories 3,942 4,006 4,081 4,240 Loans and Adv & others 984 1,137 1,159 1,204 Current assets 8,524 8,017 8,646 7,431 Other non-current assets 240 390 728 757 Investments 412 4,052 4,057 4,057 Net fixed assets 26,908 27,581 31,686 39,016 Total Assets 36,085 40,040 45,117 51,261 Payables 2,553 2,849 2,902 3,015 Others 5,369 4,765 4,795 4,922 Current liabilities 7,922 7,614 7,697 7,937 Provisions 583 765 833 834 Debt 9,715 9,901 11,401 13,901 Min int and def tax liabilities 1,407 1,734 1,684 1,634 Equity 1,755 1,782 1,782 1,782 Reserves 14,703 18,244 21,719 25,173 Total liabilities 36,085 40,040 45,117 51,261 BVPS (Rs) 93.8 112.4 131.9 151.3 Cash Flow Statement (Rs mn) PBT 3,754 6,093 6,102 6,064 Depreciation 1,223 1,223 1,245 1,270 Interest (Net) 1,430 1,253 1,263 1,443 Others (249) (280) (290) (290) CF before W.cap 6,158 8,288 8,320 8,486 Inc/dec in W.cap 87 77 (45) (95) Taxes paid (691) (2,011) (2,014) (2,001) Net CF From Operations 5,554 6,355 6,261 6,390 (Inc)/dec in F.A + CWIP 453 (4,813) (5,060) (8,310) CF from Invst Activities 453 (4,813) (5,060) (8,310) Loan Raised/(repaid) (3,344) 186 1,500 2,500 Interest Paid (1,435) (1,253) (1,263) (1,443) Dividend (295) (612) (613) (609) CF from Fin Activities (5,073) (1,679) (376) 448 Net inc /(dec) in cash 934 (137) 825 (1,472) Op. bal of cash 274 1,220 556 946 Other bank balance 1,298 544 755 1,194 Cl. balance of cash 2,506 1,628 2,136 668 Ratio Analysis EBITDA margin (%) 21.5 25.5 25.1 24.7 EBIT Margin (%) 18.0 22.6 22.2 21.8 Net profit margin (%) 9.1 12.6 12.4 11.8 Receivables (days) 13.8 14.0 14.0 14.0 Inventory (days) 50.0 45.0 45.0 45.0 Payables (days) 41.2 43.0 42.7 42.5 Interest coverage (x) 3.6 5.9 5.8 5.2 Debt/Equity ratio (x) 0.6 0.5 0.5 0.5 ROE (%) 15.8 20.4 17.4 15.1 ROCE (%) 18.4 22.7 19.7 17.3 EV/Sales (x) 1.2 1.1 1.1 1.2 EV/EBITDA (x) 5.7 4.4 4.5 4.9 Price to earnings (x) 10.7 6.9 6.9 6.9 Price to book value (x) 1.7 1.4 1.2 1.0 Price to Cash Earnings (x) 7.3 5.3 5.3 5.3 Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 4
RATING SCALE Definitions of ratings BUY We expect the stock to deliver more than 12% returns over the next 12 months ACCUMULATE We expect the stock to deliver 5% - 12% returns over the next 12 months REDUCE We expect the stock to deliver 0% - 5% returns over the next 12 months SELL We expect the stock to deliver negative returns over the next 12 months NR Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE We advise investor to subscribe to the IPO. RS Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA Not Available or Not Applicable. The information is not available for display or is not applicable NM Not Meaningful. The information is not meaningful and is therefore excluded. NOTE Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark. FUNDAMENTAL RESEARCH TEAM Rusmik Oza Arun Agarwal Amit Agarwal Nipun Gupta Deval Shah Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG Information Tech, Midcap Research Associate rusmik.oza@kotak.com arun.agarwal@kotak.com agarwal.amit@kotak.com nipun.gupta@kotak.com deval.shah@kotak.com +91 22 6218 6441 +91 22 6218 6443 +91 22 6218 6439 +91 22 6218 6433 +91 22 6218 6423 Sanjeev Zarbade Ruchir Khare Jatin Damania Cyndrella Carvalho Ledo Padinjarathala, CFA Cap. Goods & Cons. Durables Cap. Goods & Cons. Durables Metals & Mining, Midcap Pharmaceuticals Research Associate sanjeev.zarbade@kotak.com ruchir.khare@kotak.com jatin.damania@kotak.com cyndrella.carvalho@kotak.com ledo.padinjarathala@kotak.com +91 22 6218 6424 +91 22 6218 6431 +91 22 6218 6440 +91 22 6218 6426 +91 22 6218 7021 Teena Virmani Sumit Pokharna Pankaj Kumar Krishna Nain K. Kathirvelu Construction, Cement, Buildg Mat Oil and Gas, Information Tech Midcap M&A, Corporate actions Support Executive teena.virmani@kotak.com sumit.pokharna@kotak.com pankajr.kumar@kotak.com krishna.nain@kotak.com k.kathirvelu@kotak.com +91 22 6218 6432 +91 22 6218 6438 +91 22 6218 6434 +91 22 6218 7907 +91 22 6218 6427 TECHNICAL RESEARCH TEAM Shrikant Chouhan Amol Athawale Faisal Shaikh, CFTe Siddhesh Jain shrikant.chouhan@kotak.com amol.athawale@kotak.com faisalf.shaikh@kotak.com siddhesh.jain@kotak.com +91 22 6218 5408 +91 20 6620 3350 +91 22 62185499 +91 22 62185498 DERIVATIVES RESEARCH TEAM Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT, CFTe sahaj.agrawal@kotak.com malay.gandhi@kotak.com prashanth.lalu@kotak.com prasenjit.biswas@kotak.com +91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6625 9810 Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 5
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"A graph of daily closing prices of securities is available at https://www.nseindia.com/chartapp/install/charts/mainpage.jsp and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the "three years" icon in the price chart)." Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com/www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: INZ000200137 (Member of NSE, BSE, MSE, MCX & NCDEX), AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL- 23-97. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually trading in derivative contracts. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022-4285 8484, or Email: ks.compliance@kotak.com. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 6
In case you require any clarification or have any concern, kindly write to us at below email ids: Level 1: For Trading related queries, contact our customer service at 'service.securities@kotak.com' and for demat account related queries contact us at ks.demat@kotak.com or call us on: Toll free numbers 18002099191 / 1860 266 9191 Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at ks.escalation@kotak.com or call us on 022-42858445 and if you feel you are still unheard, write to our customer service HOD at ks.servicehead@kotak.com or call us on 022-42858208. Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Mr. Manoj Agarwal) at ks.compliance@kotak.com or call on 91- (022) 4285 8484. Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at ceo.ks@kotak.com or call on 91- (022) 4285 8301. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 7