In last few quarters, paper companies have delivered a good growth in their financials. But despite good quarterly results, paper stocks have not seen any great buying in last few years. And therefore, it is common to see most of the paper stocks quoting below P/E ratio of 10. However, now there is a interesting change in the paper production environment throughout the world.
Ban on Import of Waste Paper by China
China is believed to be among those countries having power to change the overall outlook of most of the sectors. Recently, China has banned the import of waste paper in their nation. Earlier, China was using this waste import to fuel its industries. Paper industry is one of them which uses it as a source of raw material. But with the ban on import, there are expectations that we could see a significant fall in production volume of paper in China. And therefore in result, we could see a significant rise in prices of paper due to fall in supply and stability in Demand in international market.
On Friday trading session, we saw some good buying in paper stocks. JK Paper ends 10 percent higher, whereas many other paper stocks also closed on a higher note.
Currently, price of paper in China is quoting around 5,500 yuan per tonne or 40 percent higher since August. But the way that China has taken a step against pollution by banning import of waste paper and shut down of many paper industries in country, i think we could see some great rise in price of paper soon. Meanwhile, we could also see a fall in cost of waste paper due to reduced demand which could result in a cut in expenditure cost on raw material for paper companies.
So, overall there is a set of good news for paper companies. Step taken by China will bring opportunity for paper companies in India to raise prices of paper and capture a great market in China. This all translates into a profitable boost for paper companies which we could see soon.
From valuation point of view, i think paper stocks are currently available at a very favorable cost for investor. After some calculations, i see a clear possible upside of 150–200 percent in next 1 year in paper stocks. But although, how much a paper stock would give you a return will mostly determine by how domestic paper companies utilise this opportunity in short-term. Therefore, it could be a great choice to hold atleast one good quality paper stock in your portfolio for next 1 year.
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