JK Paper — Q4 FY24 earnings call

Call held 21 May 2024

Management summary

JK Paper reported a challenging Q4 FY24 due to significant price declines in key paper and packaging board segments, compounded by a sharp 30-35% increase in wood costs. Despite these headwinds, the company achieved a robust FY24 EBITDA margin of 26-27%. Management highlighted ongoing import dumping from ASEAN countries as a major challenge for the coming year, while outlining strategic plans for mechanical pulp integration and continued expansion in the packaging segment.

Highlights

  • FY24 consolidated EBITDA margin stood at 26%-27%, exceeding the industry's long-term average.

  • Q4 FY24 experienced a sharp price drop in Packaging Board, Maplitho Paper, and Coated Paper segments.

  • Wood cost, a key raw material, increased sharply by 30%-35% during FY24.

  • Sirpur unit's FY24 EBITDA margin (excluding incentives) was 22%-23%.

  • The packaging company segment recorded an FY24 EBITDA margin of approximately 10%.

  • Current international chemical pulp prices are $700-$750 per ton, with mechanical pulp at $570-$600 per ton.

  • The company plans to integrate 70% of its mechanical pulp requirement by FY25-26, expecting $100-$150 per ton in cost savings.

  • Annual capacity utilization for the corrugated industry is 55%-60%.

Concerns

  • Import Dumping from ASEAN and China

  • High Wood Raw Material Costs

Key financials

  1. EBITDA Margin 26%
  2. Wood Cost Increase 30%

What they filed

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

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue1,424 1,390 1,652 1,600 1,421 −0%1,560 +12%1,807 +9%1,700 +6%
EBITDA222 140 199 226 165 −26%133 −5%226 +14%235 +4%
Net profit121 61 74 76 57 −53%15 −75%83 +12%113 +49%
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

  • Sirpur (excl. incentives)
    22% FY24 EBITDA Margin
  • Packaging Company
    10% FY24 EBITDA Margin

Guidance & targets

Profitability

  • Return on Invested Capital (ROIC) Profitability · long run · High confidence 14%-15%
    in long run we would expect something around minimum 14% to 15% return on investment that is our criteria of any project or any acquisition

    — A.S. Mehta, President and Director

  • Return on Equity (ROE) Profitability · all the time · High confidence more than 20%
    the operational efficiency it will remain a focus area all the time I mean irrespective that we are the least cost manufacturer, but we continue to be the least cost manufacturer and that can happen only when we continuously drive our operating parameters to the next level all the time.

    — A.S. Mehta, President and Director

Capacity

  • Ludhiana Plant Utilization Capacity · by end of the year · Medium confidence more
    Hopefully, this year our target is to utilize the capacity more and by end of the year we should be.

    — A.S. Mehta, President and Director

  • Mechanical Pulp Integration Capacity · FY25-26 · High confidence 70%
    close to 70% of our mechanical pulp will be integrated and only 30%-35% we will import thereafter

    — A.S. Mehta, President and Director

Raw Material Cost

  • Long-run Pulp Prices Raw Material Cost · long run · Medium confidence $550 (+/-25)
    in long run the pulp prices should remain in the band of $550 (+/-25).

    — A.S. Mehta, President and Director

Volume

  • JK Paper Growth Volume · coming year · Medium confidence double digit plus
    JK Paper growth has to be a double digit and double digit also plus double digit.

    — A.S. Mehta, President and Director

  • Packaging Board Production Increase Volume · near term · High confidence 10%-15%
    we should be able to increase production by close to 10% to 15% from the same machine

    — A.S. Mehta, President and Director

Cost

  • Cost Saving from Mechanical Pulp Integration Cost · FY25-26 · Medium confidence $100-$150
    it should give us a saving of $100 to $150 per ton of pulp

    — A.S. Mehta, President and Director

Risks & concerns

  • Import Dumping from ASEAN and China

    high

    Surplus capacities and lower raw material costs in countries like Indonesia (due to forest concessions and FTAs) lead to dumping in India, impacting domestic prices and profitability. Aggravated by duties imposed by Western countries redirecting dumping to India.

    Management acknowledged

  • High Wood Raw Material Costs

    high

    Wood cost, a basic raw material, increased sharply by 30%-35% in FY24, directly impacting Q4 profitability. Management expects raw material costs to remain stable +/-5% going forward.

    Management acknowledged

  • Delays in Government Action on Antidumping Duties

    medium

    The process for reviewing FTAs and imposing antidumping duties is cumbersome and takes a long time, despite government intent to support domestic industry. Antidumping petition filed for packaging board against Indonesia, China, and Chile.

    Management acknowledged

  • Global Pulp Price Volatility

    medium

    International chemical pulp prices have recently moved sharply upward to $700-$750 per ton, impacting import intensity and domestic Net Sales Realization (NSR).

    Management acknowledged

Areas of evasion (2)

  • Specific product Net Sales Realization (NSR)
  • Future capital return policy (buybacks/dividends)

Q&A highlights

2 direct, 1 evasive
Free Cash Flow Calculation and Capital Allocation Strategy Evasive
That I can't comment at this point.

Reveals a discrepancy in Free Cash Flow understanding between management and analyst, and management's reluctance to commit to specific capital return policies (buybacks/dividends) despite strong cash generation.

Asked by Viraj Mahadevia

Impact of Imports and Need for Antidumping Duties Direct
when you dump the product cheaper than the selling prices in your own country there is a dumping, so they are dumping.

Highlights a significant external risk (dumping from ASEAN/China) and the company's reliance on uncertain government policy for a level playing field, impacting domestic pricing and profitability.

Asked by Kunal Tokas

Corrugated Business Capacity Utilization and Conversion Costs Direct
on an annual basis, our utilization is close to 55%-60%.

Provides specific operational metrics for a key growth segment, indicating current utilization levels and cost structures, which are crucial for assessing future growth and margin potential.

Asked by Amit Doshi

2 min read 6 chapters

Detailed narrative

Q4 FY24 Performance and Profitability Headwinds

JK Paper experienced a challenging Q4 FY24, marked by a sharp decline in prices for Packaging Board, Maplitho Paper, and Coated Paper. Concurrently, wood costs, a primary raw material, surged by 30-35% during FY24. Despite these pressures, the company maintained an FY24 consolidated EBITDA margin of 26-27%, which management noted is above the long-term industry average. The profitability drop was primarily attributed to lower realizations amidst higher input costs.

Segmental Performance and Operational Efficiency

The Sirpur unit recorded an FY24 EBITDA margin of approximately 30%, which dropped significantly in Q3 and Q4 due to price declines. Excluding state incentives, Sirpur's FY24 EBITDA margin was 22-23%. The packaging company segment faced a difficult FY24, achieving an EBITDA margin of around 10%, below the ideal 12-14% range for the corrugation industry. The corrugation industry's annual capacity utilization for JK Paper stands at 55-60%, with an ideal range of 70-75% to meet peak demand, indicating room for improvement.

Raw Material Cost Dynamics and Import Competition

International chemical pulp prices, after a period of stability, have recently risen sharply to $700-$750 per ton, while mechanical pulp prices are currently $570-$600 per ton. Management expects long-run pulp prices to stabilize around $550 (+/-25) per ton. The company faces significant import competition, particularly from Indonesia (an ASEAN bloc member) and China, which benefit from lower raw material costs due to forest concessions and FTAs, leading to dumping in the Indian market.

Strategic Acquisitions and Growth Outlook

JK Paper has invested approximately Rs. 694-695 crores in acquiring 100% of HPPL and SPPL, with an additional acquisition of Manipal Utility Packaging Solution. The company targets a minimum 14-15% return on invested capital for acquisitions, aiming for 4-5% above its 9-10% post-tax WACC. The Ludhiana plant, commissioned in August 2023, is focused on increasing capacity utilization by year-end. The company plans to expand its packaging board production by 10-15% through debottlenecking.

Mechanical Pulp Integration for Cost Savings

Currently, 100% of mechanical pulp for packaging board is imported. By FY25-26, JK Paper aims to integrate approximately 70% of its mechanical pulp requirement through a new pulp mill, which will produce hardwood mechanical pulp. This integration is projected to yield cost savings of $100-$150 per ton of pulp, depending on future market prices, and contribute to input cost reduction and supply stability. This project is expected to deliver a return on investment of around 15%.

Capital Allocation and Free Cash Flow Management

Management estimates the company's free cash flow (net cash accrual in treasury) to be around Rs. 500 crores, after accounting for debt repayment (Rs. 350-400 crores), dividends (Rs. 135-140 crores), and maintenance CAPEX (Rs. 100-150 crores). The company intends to maintain a 'small element of borrowing' on its balance sheet, using free cash flow as a 'war chest' for future projects, acquisitions, or expansion, rather than aiming for a zero-debt position.

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