Weekly Recap: The Paper Stock Rally

First, a quick recap of everything we’ve covered this week. Monday we took a day off, Tuesday we discussed 3 brands that built India. On Wednesday we talked about the mystery traders in Sikkim, then we discussed the climate change issue in Greenland and finally we talked about the next big UPI test.

Also, before we get into today’s story, a little announcement. If you would like to receive our daily 3-minute newsletter that breaks down business and finance news in plain English —Click here!


The story

When the pandemic hit the ground in 2020 (yes, we’re still talking about the pandemic), people called their newspaper suppliers and said, “Boss, please don’t deliver my newspaper for a few months.” They feared that the coronavirus would stick to the paper and infect them. So they stopped reading newspapers.

Meanwhile, schools have closed and gone online. The children no longer needed notebooks “for the start of the school year”. They could simply scribble their teacher’s instructions on their computer. Maybe on Google Docs.

Businesses have also moved away from paper as digitization has accelerated. They stopped sending hard copies of annual reports to shareholders. They no longer printed long memos for meetings.

Essentially, the demand for all kinds of paper has dropped. And the paper industry was shocked. Overnight, much of their business had evaporated.

Then a savior emerged: e-commerce. People didn’t leave their homes much since they could order anything they needed on e-commerce platforms. And it gave the packaging boxes a massive boost!

But guess what goes into making these boxes? Different types of paper, of course! So, amidst all this gloom, there was still hope for the paper industry.

But investors weren’t entirely convinced. While the stock market soared, shares of paper companies i.e. JK Paper, West Coast Mills, Tamil Nadu Newsprint & Papers did not rebound as much. Maybe they were worried about something else. Something related to waste paper.

Let’s explain.

Paper is made mainly in two ways. One method uses wood pulp from trees. And the other uses recycled old paper to create new paper. But per capita paper consumption in India is only 20-30 kg. The West, on the other hand, consumes a staggering 350 kg per capita. Naturally, this also generates a lot of waste. Thus, India supplies 70% of its waste paper needs by imports from Europe and the United States.

But during the pandemic, these countries weren’t buying a lot of waste paper. For example, the circulation of old newspapers dropped by 35% per year and there simply wasn’t enough old paper to go around. Naturally, waste paper has become an expensive commodity. The annual report of a paper company indicates that prices have increased by almost 50% during this period.

Even freight costs have increased by 3 times due to a tightening of shipping containers. And to make matters worse, in November 2021, Europe even banned exports of waste paper to India. It was a real struggle.

But 2022 has been different. In fact, it was quite spectacular. Many paper stocks have soared 100% in the last 8 months alone. For context, the benchmark BSE Sensex is up a meager 2%.

So what’s going on?

For starters, the EU lifted its ban on April 1. They blamed the ban on a clerical error! But all’s well that ends well. And it is now becoming much easier for Indian papermakers to source waste paper. There is also the fact that offices and schools are operational again. Children doodle in notebooks. Offices print thick documents. And e-commerce orders continue to explode.

All of this has led many papermakers to operate at 100% capacity with all machines running.

Papermakers also took unprecedented price increases from October 2021 of the year. For example, writing and printing paper (W&P) prices hit an all-time high, with retail prices hitting ₹90 per kg. And companies have been able to pass on their increased costs quite well.

There is also another detail. According to a Centrum report, the benefits of price increases may not yet have fully trickled down to earnings. In fact, they expect a 20-25% increase in Net Sales Achievement (NSR) this year.

What are you asking?

Well, think of it this way. You can improve your turnover by selling more paper or you can do it by charging a higher sum. Net sales achievements tell you about the second half. It is calculated by dividing the total value of sales by the total tonnage. So if the NSR is going up, that means companies are convincingly charging a higher price for their paper.

And if you look at one of India’s largest paper companies, JK Paper, you’ll see that it reported one of its highest ever NSRs, as well as higher volumes. This is therefore clearly an advantage for paper companies.

And finally there is something else. Paper companies with backward integration capabilities performed better than others. What do we mean? So if a company is backwards integrated, it means that it has developed the capacity to produce the raw material itself, for example wood pulp. This in turn reduces their dependence on third parties and they can control the cost of their inputs.

For JK Paper, its cost per ton has fallen by 5% since fiscal 2019, as it has been able to source most of its raw materials locally. Even other companies like West Coast Mills have seen their cost per ton increase by only 3%.

Alright, it’s all in the present. What about the future, you ask?

Well, there are two things you need to know.

First, there is the ban on single-use plastic imposed a few months ago. Thus, e-commerce companies can no longer use plastic to cover their packaging and they have opted for paper cushions. Not to mention the renewed demand for all things paper – straws, cups and bags!

Second, there is the impending implementation of the National Education Policy (NEP). As the curriculum changes, new books will need to be published and old ones will be recycled. There will likely be a lot of paper demand for this seemingly unrelated event.

Taken together, you can see why there is so much optimism around paper stocks. The only question now, however – “Will this rally last?”

We’ll let you be the judge.

Until there…


Ditto Insights: Why Millennials Should Buy a Term Plan

According to a survey, only 17% of Indian millennials (25-35 years old) have taken out term insurance. The actual numbers are likely even lower.

And the most disturbing fact is that 55% had not even heard of term insurance!

Why is this happening then?

A common misconception is the dependent riddle. Most millennials we talk to want to buy a term policy because they want to cover their spouse and children. And that makes perfect sense. After all, in your absence, you want your term insurance policy to pay out a large sum of money to cover the future needs of your family. But these same people do not see their parents as dependents, even though they are largely supportive. I remember when it hit me. I regularly send money home, but I had never considered my parents as my dependents. And when a colleague told me about his experience, I immediately put two and two together. They depended on my income and my absence would most certainly affect them financially. So a long-term plan was a no-brainer for me.

There’s another reason Millennials should probably consider considering a term plan: debt. Most people we spoke to have home loans, education loans, and other personal loans with a hefty interest charge. In their absence, this burden would be transferred to their dependents. It’s not something most people think about, but it happens all the time.

Finally, you actually get a pretty good deal on term insurance prices when you’re younger. The idea is to pay a nominal sum each year (something that won’t burn your pocket) to protect your dependents in the event of an untimely death. And these fees are lowest when you are young.

So if you’re a millennial reading this, maybe you should reconsider buying a term plan. And don’t forget to talk to us at Same while you are there. We’ll make sure you’re secure every step of the way.

Until next time…

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