JK Paper stock corrects 19% from recent peak. Is it time to buy the dip?

JK Paper experienced significant selling pressure following the release of its June quarter results, which showed a sharp decline in net profit. The company reported a drop in margins due to weak realisations and higher raw material costs. Additionally, employee benefits and other operating expenses rose during the quarter due to the complete acquisition of the packaging business, resulting in a weak performance in Q1FY25. 

Following the announcement of its results, the stock has corrected by 7.6%, falling to ₹520 apiece, over a span of four sessions. This decline has brought the stock to a level that is 18.60% below its recent peak of ₹638.75, which was reached in July. 

However, domestic brokerage firm B&K Securities remains optimistic about the company's growth prospects. It notes that price increases in the packaging boards segment have been implemented since July. Although margins for corrugated boards are lower than those for the W&P segment, the substantial increase in volume is expected to positively impact future performance.

As a nearly fully integrated plant with a significant boost in production capacity, the brokerage expects the company is set to benefit from the increased volume in the packaging segment following the full consolidation of acquired packaging companies.

Consequently, the brokerage has maintained its 'buy' rating on the stock and upgraded the target price to ₹634 from the previous ₹523.

Is it in the price?

JK Paper reported higher sales, surpassing B&K Securities' estimates due to increased volumes, primarily from packaging acquisitions. However, EBITDA and PAT fell short of the brokerage's expectations.

The EBITDA margin declined by 1,376 basis points year-over-year to 16% in the current quarter, down from 30% in the same quarter last year. Absolute EBITDA stood at ₹28 billion, a 41% decrease from ₹47 billion in 1QFY24.

PAT declined by 55% year-over-year to ₹14 billion, with a PAT margin drop of 1,151 basis points, impacted by higher operating expenses and lower other income.

B&K Securities attributed the weak performance to lower market prices and rising wood costs, which negatively impacted the company's results for the current quarter. While higher volumes boosted the topline, driven by higher utilisation in the packaging board business, increased raw material costs squeezed margins, it noted. 

‘Realisation set to improve in next quarter’

In the first quarter of FY25, JK Paper achieved capacity utilisation of 107%, up from 99.8% in the same quarter last year. The company's sales volume increased by 16.3%, reaching 204,657 tonnes compared to 175,952 tonnes in 1QFY24.

However, due to lower price realisations and the consolidation of corrugated packaging entities, consolidated EBITDA per tonne fell to ₹13,700 in 1QFY25 from approximately ₹27,000 in 1QFY24.

It anticipates an average realisation increase of ₹1,500 per tonne in the next quarter due to higher realisation in packaging boards. It also anticipates that W&P prices will rise during the busy Q2/Q3 period for the paper industry due to new textbook printing.

Meanwhile, the company acquired the remaining 15% equity shares of its subsidiary companies, Horizon Packs Pvt. Ltd. (HPPL) and Securipax Packaging Pvt. Ltd. (SPPL), making them wholly owned subsidiaries.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.