Concall AI

JK Paper — Q4 FY23 earnings call

Call held 19 May 2023

Management summary

JK Paper reported a phenomenal FY23, achieving record turnover, EBITDA, and PAT, significantly exceeding previous year's performance. The company saw strong capacity utilization and successful integration of its corrugated packaging acquisitions. Management expressed confidence in continued volume growth and strategic capital allocation, despite anticipating market volatility and rising raw material costs in FY24.

Highlights

FY23 Turnover reached INR 6,772 crores, a significant increase from INR 4,244 crores in the previous year.
EBITDA for FY23 stood at INR 2,184 crores, nearly doubling from INR 1,122 crores in FY22.
FY23 EBITDA Margin was 33.1%, with Q4 margin at 29.8%.
PAT for FY23 crossed the INR 1,000 crores milestone, reaching INR 1,208 crores, more than double the INR 544 crores in FY22.
Capacity utilization for the year was 103.9%, up from 100.1% last year.
Consolidated net debt was reduced to approximately INR 1,900 crores, with net debt to EBITDA at 0.89.
The newly acquired corrugated packaging business contributed INR 190 crores in topline and INR 18 crores in EBITDA in Q4 FY23.
The company plans to achieve a consolidated turnover of INR 7,000-7,500 crores in FY24.

Concerns

Market Volatility in Paper Industry

Key financials

3 periods

Headline

Turnover
₹6,772 Cr
YoY +59.6%
EBITDA
₹2,184 Cr
YoY +94.7%
PAT
₹1,208 Cr
YoY +122.1%
Capacity Utilization
103.9%
Net Debt
₹1,900 Cr
Net Debt to EBITDA
0.89

Q4 FY23

EBITDA Margin
29.8%

FY23

EBITDA Margin
33.1%

What they filed

Q1 FY27: revenue up 6.3%, net profit up 48.7% against the same quarter last year.

₹ Cr · quarterly

Line item	Q2 FY25	Q3 FY25	Q4 FY25	Q1 FY26	Q2 FY26	Q3 FY26	Q4 FY26	Q1 FY27
Revenue	1,424	1,390	1,652	1,600	1,421 −0%	1,560 +12%	1,807 +9%	1,700 +6%
Expenses	1,201	1,250	1,454	1,375	1,256	1,427	1,581	1,464
EBITDA	222	140	199	226	165 −26%	133 −5%	226 +14%	235 +4%
Margin	16%	10%	12%	14%	12%	9%	13%	14%
Other income	31	22	17	17	18	0	5	23
Interest	61	17	44	61	44	39	47	31
Depreciation	63	62	76	74	64	76	77	76
Profit before tax	130	82	96	108	74 −43%	18 −78%	108 +13%	152 +41%
Tax rate	7%	26%	23%	29%	24%	20%	24%	26%
Net profit	121	61	74	76	57 −53%	15 −75%	83 +12%	113 +49%
EPS	7.14	3.61	4.37	4.50	3.34	0.87	4.55	6.23

How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

Share of Topline

₹421 Cr Total

Corrugated Packaging Business (Full Year Consolidation FY23) ₹231 Cr 54.9%
Corrugated Packaging Business (Q4 FY23) ₹190 Cr 45.1%

Guidance & targets

Turnover

Consolidated Turnover Turnover · FY24 · Medium confidence ₹7,000-7,500 crores

And if you consolidate it on a full year for kraft, I mean, the corrugation business and the paper and packaging board business, we should be close to INR7,000 to INR7,500 crores as a topline.

— A.S. Mehta

Corrugation Business

Corrugation Business Turnover Corrugation Business · FY24 (Full Year Consolidation) · Medium confidence ₹1,000-1,100 crores

I would say that on a full year consolidation basis, the corrugation business should give close to INR1,000 crores to INR1,100 crores of turnover

— A.S. Mehta
Corrugation Business EBITDA Corrugation Business · FY24 (Full Year Consolidation) · Medium confidence ₹100-120 crores

and EBITDA of INR100 cores to INR120 crores, depending on what kind of a craft paper prices trend remains in the market in coming year.

— A.S. Mehta
Corrugation Business Margin Corrugation Business · Long-term · Medium confidence 10-16%

corrugation business will give a margin of something around 10% to 16% depending on which period are we in. Right now, if you ask me, the margin is 12% to 14% in this industry. And in time to come when you utilize the capacity better, it could be 12% to 16% in the corrugation business.

— A.S. Mehta
Acquired Plant Capacity Corrugation Business · Current · High confidence 260,000 tons

I think the capacity of the plant we acquired is what, 2,60,000 tons.

— A.S. Mehta
Additional Capacity Corrugation Business · By end of FY24 · High confidence 20,000 tons

I think it is something around 20,000. ... Around 20,000 additions.

— A.S. Mehta, Management
Average Utilization Corrugation Business · Future · High confidence 70%-plus

From 60% today

Right now it is 60%. So we want to take it to 70%-plus.

— A.S. Mehta

Profitability

Paper Industry EBITDA Margin Profitability · Sustainable · Medium confidence 20-25%

See, I would say that the paper industry EBITDA margin, I would say that if it remains in the band of 20% to 25%, it is a decent EBITDA margin.

— A.S. Mehta
Sustainable Industry Margin (Net Sales %) Profitability · Long-term · Medium confidence 20-25%

I would say that anywhere between 20% to 25% is sustainable decent margin for the industry, where your ROCE would be healthy.

— A.S. Mehta

Debt

Debt Repayment Debt · FY24 · High confidence ₹450-540 crores

So, on the rebate repayment will be almost INR450 crores. INR500 crores. ... around INR500 plus, INR500 crores to INR540 crores will be.

— Management, K.R. Veerappan

Capacity Utilization

Packaging Board & Sirpur Utilization Capacity Utilization · After Q2 FY24 · High confidence 100%

hopefully in this year, maybe after the second quarter, we should be operating at 100% at both the facilities.

— A.S. Mehta

Capacity

Ludhiana Plant Production Capacity · June / next 2-3 months · Medium confidence Sizable production

So, hopefully in next 2-3 months' time, we should be up and running the Ludhiana plant at a decent level.

— A.S. Mehta

Capital Allocation

War Chest Capital Allocation · Before further investments · High confidence ₹1,500 crores

I had given the target that we should have close to INR1,500 crores of the war chest before we do anything.

— A.S. Mehta

Raw Material

Sustainable Pulp Prices Raw Material · Long-term · Medium confidence $525-600 per ton

So, sustainable pulp prices would be in the band of $525 to $575 or $600.

— Management
Wood Price Inflation Raw Material · Future · High confidence Further pressure

No, I am saying that there will be a further pressure.

— A.S. Mehta

Pricing

Paper & Board Prices (Pulp at $500) Pricing · Current market · Medium confidence $800-850 per ton

if the if the pulp prices remain at $500, then the prices at that level should be somewhere around $800 to $850. And plus some kind of a $50 clearing, forwarding, other logistics or whatever it is. So $900 price.

— A.S. Mehta
Paper & Board Prices (Pulp at $600) Pricing · Long-term · Medium confidence $900-950 per ton

And if $600 is the price, the pulp price $600, the paper and board prices would be close to $950 to $900, $950

— A.S. Mehta

Demand

Writing Printing Paper Demand Demand · FY24 (New Education Policy) · Low confidence Sizable demand

I would say that there will be a sizable demand because of the new education policy. Yes.

— A.S. Mehta

Volume

Volume Growth Volume · FY24 · High confidence Higher

Coming year also the volume is going to be higher. It can't be lower.

— A.S. Mehta

Risks & concerns

Market Volatility in Paper Industry
high

Management stated that the market is likely to be volatile in coming days and that price and commodity volatility will remain in FY24, making it difficult to predict margins.

Management acknowledged
Sustainability of Global Pulp Prices
medium

Management indicated that current pulp prices around $500 per ton are not sustainable for pulp manufacturers, suggesting potential future increases.

Management acknowledged
Increasing Wood Procurement Costs
medium

Wood costs are increasing due to higher demand from MDF/plywood industries and linkage to MSP for food grains, with further pressure expected, impacting profitability if output prices fall.

Management acknowledged
Learning Curve and Teething Issues in Corrugation Business
low

Management admitted it's early days for the corrugation business with daily new learnings and some teething issues at the Ludhiana plant, though they are confident in the team.

Management acknowledged
Import Surge in Paper
low

An analyst raised concern about surging imports in FY23. Management explained it was due to higher domestic demand, leading to reduced exports, and maintained India would remain a net exporting country.

Analyst downplayed

Areas of evasion (1)

Net Sales Realization (NSR) figures

Q&A highlights

3 direct

Q4 margin variation and elevated other expenses, specifically regarding the impact of acquired corrugated packaging companies. Direct

Yes, your question on Q4 margin variation, I think we have mentioned that there has been a little bit of a price drop in the coated paper and the packaging board. And as far as the other expenses are concerned, if I'm not wrong, we are seeing the consolidated number and consolidated this time we have the two companies, Horizon Pack and Securipax packaging expenses also added in that expenses. So that's why compared to last year, it looks higher. Otherwise, it's just the consolidation impact.

This question clarified the drivers behind Q4 margin fluctuations and the impact of recent acquisitions on the expense structure, providing context for the consolidated results.

Asked by Harsh Shah

Contribution to PAT from the corrugated packaging business and the strategy for ramping up profitability and operations. Direct

The corrugation business and as you rightly said that it is too early for us because we are also learning this business. And every day there is some new learning for us in this business. But I would say that we have a good team in that business and the erstwhile promoter, they are still continuing with us, and they are contributing in a very, very positive manner. So, we have a good mix of team, some of the people coming from JK paper business and the existing or the erstwhile promoter, they are continuing.

The analyst sought clarity on the profitability of the new segment and management's approach to integrating and growing it, which is crucial for understanding future consolidated performance.

Asked by Deepak Lalwani

Increasing wood procurement costs, its underlying reasons, and the impact on the company's profitability. Direct

All right. See, the wood procurement cost is increasing because the wood, the requirement has gone up because of two factors. One is the MDF and the plywood. When the construction industry is doing better, then the requirement of and the demand of plywood and MDF goes higher and they need additional wood and since they do not do plantation, so the pressure comes on the plantation done by the paper industry. So, in fact, in northern part of the country as well as in the western part of the country, prices moved up substantially and later on the impact also was felt in the southern part of the country.

This question addressed a critical raw material cost component, explaining the market dynamics driving price increases and its potential impact on the paper industry's profitability.

Asked by Amit Doshi

3 min read 6 chapters

Detailed narrative

Record Financial Performance in FY23

JK Paper delivered a 'phenomenal year' in FY23, achieving its highest-ever turnover of INR 6,772 crores, a substantial increase from INR 4,244 crores in FY22. EBITDA nearly doubled to INR 2,184 crores from INR 1,122 crores, with an impressive full-year EBITDA margin of 33.1%. Net Profit After Tax (PAT) also crossed the INR 1,000 crores mark, reaching INR 1,208 crores, more than double the INR 544 crores reported in the previous year. The company maintained strong operational efficiency with a capacity utilization of 103.9%.

Strategic Expansion into Corrugated Packaging

The company successfully acquired two corrugated packaging businesses, which are now the largest in the country. In Q4 FY23, this segment contributed INR 190 crores to the topline, INR 18 crores to EBITDA, and INR 4 crores to PAT. For the full year, the consolidated corrugated business added INR 231 crores in topline and INR 23 crores in EBITDA. Management projects this segment to achieve INR 1,000-1,100 crores in turnover and INR 100-120 crores in EBITDA for FY24, with a target margin of 10-16% in the long term.

Capacity Utilization and Future Growth Plans

JK Paper's packaging board and Sirpur units are currently operating at 90% utilization, with a target to reach 100% after Q2 FY24. The newly commissioned Ludhiana plant for corrugation is expected to achieve sizable production within the next 2-3 months, following initial teething issues. The acquired corrugated plants have a capacity of 260,000 tons, with plans to add around 20,000 tons by the end of the current year, aiming to improve average utilization from 60% to over 70%.

Raw Material Cost Trends and Pricing Outlook

Wood procurement costs are increasing due to higher demand from the MDF and plywood industries, with price increases ranging from 6% to over 25% depending on the region, and further pressure is anticipated. Global pulp prices, currently around $500 per ton, are considered unsustainable, with a sustainable range of $525-600 per ton. Management indicated that if pulp prices remain at $500, paper and board prices should be in the $800-850 range, increasing to $900-950 if pulp reaches $600.

Debt Management and Capital Allocation Strategy

The company has significantly reduced its consolidated net debt to approximately INR 1,900 crores, resulting in a healthy net debt to EBITDA ratio of 0.89. For FY24, JK Paper plans to repay INR 450-540 crores of debt. Management is focused on building a 'war chest' of INR 1,500 crores before making further significant capital allocation decisions, emphasizing a judicious and balanced approach to investments to avoid past losses.

Market Outlook and Impact of New Education Policy

Management expects the market in FY24 to be volatile, with continued price and commodity fluctuations. However, they anticipate a 'sizable demand' for writing and printing paper due to the implementation of the New Education Policy (NEP), which is driving a return to physical copies and increased activity in schools and coaching centers. Despite potential volatility, JK Paper aims for higher volumes in FY24 and believes a sustainable industry EBITDA margin of 20-25% is achievable.

This is an AI-generated summary of a publicly available earnings call transcript.

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