Last few years were harsh on Paper industry. Most of the Indian firms faced tough competition from the imports and also their earning capacity was restricted due to heavy investment in technology in order to comply with the latest environmental laws. Please note that the laws I am talking about were about the chemicals and bleaches used in processing of paper pulp and the effluents that are subsequently discharged. India still continues to be lax in enforcing the laws on deforestation and planting of saplings to replenish the green-belt.
Most firms were forced to invest in technology, plant and machinery and few companies like Tamil Naidu Paper (a PSU) and West Coast Paper Mills used the opportunity for capacity addition. Now time is ripe to reap the benefits. My associates made quite a killing in the recent bull run of Tamil Naidu Paper when the new capacity enabled the company to post higher sales and EPS. (I was a student and did not have much surplus cash for investments). West Coast paper mill’s capacity addition was delayed by about 6 months due to some operational difficulties. Hence it is still ripe for investments.
Apart from very low PE, what interests me in this sector is:
- Stable earnings and revenue (which is independent of economic cycles)
- High dividend yield. (so you don’t have to grow old before you can see the first fruits of your investment)