Large AMCs’ exposure to paper companies rises by 80%
ET Intelligence Group: At first glance, paper seems hardly the ideal canvas for a blockbuster investment script. But big funds are chasing paper makers amid the broader-market sell-off, drawn by fundamental demand drivers for the otherwise cyclical industry.
Fund exposure to paper-makers, many of which are small companies, has risen 80 per cent to Rs 525 crore in August in comparison with the same month last year. And the money flow is dictated more by fundamental prospects than momentum.
First, the demand for paper has revived in India thanks to the cut in paper production in China due to environmental concerns. Second, there is an increasing trend to use paper in ready-to-eat food products due to the ban on the use of plastic bags. Third, paper is being increasingly used in quality packaging of FMCG products in organised retail. Fourth, increasing literacy and growth in the education sector have also enhanced paper consumption.
A combination of these factors has prompted paper companies to increase prices across categories two to three times. According to CARE estimates, the paper industry is estimated to grow at a compounded annual growth rate of 6.6 per cent between FY16 and FY19 across various categories by touching 18.5 million tonnes of capacity in FY19 from 15.3 in FY16. This rise in pricing power and demand has drawn fund managers to the stocks.
Furthermore, key paper companies such as West Coast Paper MillsNSE -5.12 %, JK PaperNSE -1.08 % and N R Agarwal IndustriesNSE -4.36 % have been able to reduce debt in the past two quarters and enhance cash-flow visibility. The debt to equity ratios of West Coast Paper Mills, JK Paper and N R Agarwal Industries reduced to 0.3, 0.6, 1 from 0.5, 1.1 and 2, respectively, a year ago.
Source: India Times