Stock Reivew: JK PAPER

 

 

JK Paper has come out with a rights issue of 246 crore to part finance its expansion plans. As per the offer, the company will issue 5.86 crore shares, in the ratio of 3 shares for every 4 shares, at a price of 42 with a face value of 10.

The company plans to expand manufacturing capacity at its Orissa plant. This will take its overall paper manufacturing capacity to 414,000 tonnes per annum from 264,000 tonnes per annum.

The expansion cost is estimated at around 1,653 crore. This will be funded through 246 crore from the rights issue, 150 crore from internal accruals, 226 crore through foreign currency convertible bonds and the balance 1,031 crore through debt. The company is one of the leading paper manufacturers. In the last three years, its net sales have doubled to 1,336.2 crore while net profit has trebled to 106.4 crore.

At the offer price of 42 per share, the company is demanding a pre-dilution price to earnings multiple of 5.5 which is lower than the industry average of 8.
But the recent correction in its share price has made the offer unattractive. The company's stock has tumbled by 11% in the last one month to 42.
At this price level, JK Paper looks an attractive long-term investment, but an existing shareholder could either subscribe to the rights issue or buy the stock directly from the market if the share price falls below 42. The management has committed to buy the unsubscribed portion of the issue.