The government banned single-use plastic (SUPs) products from July 1. This opened up a new growth avenue for companies in the paper business, as paper-based items are an immediate substitute for SUP products.

Share Market Live

NSE

One benefactor of this development can be ITC Group, whose Paper & Specialty Papers Division (ITC-PSPD) is into sustainable paper and paperboard solutions. ITC-PSPD has been developing an alternative to SUPs for some time now. The division is into biodegradable boards, recycle boards and barrier-coated boards which can be used by the food and beverage industry.

Amnish Aggarwal, Head of Research at Prabhudas Lilladher, said, “The ban on single-use plastic, especially straws will have a bit of impact on many companies who are claiming to replace SUP with paper. But time will tell if that will be a big gamechanger for ITC."

Also read: Plastic straw ban worries beverage makers but Dabur may not singe its fingers

He added the conglomerate is into writing and printing papers, where they have forward integration with their ClassMate Brand. "ITC has been a leader in the deluxe board segment for many years."

The company’s paper division manufactures paper cups, plates, trays, and bowls among other single-use paper-based products. The division at present serves top brands in industries such as consumer goods, foods, beverages, liquor, pharma and others, across India and abroad.

The division has four units — Bhadrachalam, Kovai, Bollaram and Tribeni. There is a greenfield project in Gujarat that is expected to be commissioned in the ongoing quarter of the current financial year.

In the paper business, the company is in lifetime high margins. But the main reason for the surge in ITC stocks is largely due to its cigarettes businesses.

Added Aggarwal, "A major reason for ITC stocks to move up is its cigarettes business because a large part of its profit — 85-90 percent — is cigarettes. The SOTP (sum-of-the-parts) valuation is 80 percent for cigarettes. Over the past two years, there has been no rise in the excise duty and GST on cigarettes. The prices are stable and COVID impact is waning."

In addition, in the other businesses like ITC Hotels, occupancy and ARR levels are moving upward. "The hotel industry is coming out of a bad patch and that will benefit ITC." In the past 2-3 years, ITC's margin in the FMCG business has more than doubled — from 4 percent to 9 percent. "It is a rare situation, where all of ITC businesses are doing well." This stock has not given any returns in the last four-five years to investors.

Also read: India will ban these single-use plastic items from July 1

ITC's paper business is largely integrated with a huge pulping capacity of its own. "They have pricing power in certain paper products as they are the only manufacturer," added Aggarwal.

An industry source said, "ITC's paper division can be a major benefactor. This is largely because of the quality and also it's not import dependent."

Near-to-medium term, the outlook is intact, Aggarwal added. “If bulk prices move up internationally, then ITC gains. The backward integration of ITC is relatively high compared to other players."

"If global commodity prices see a meltdown and prices in the Indian market are also correct, then there is a probability that margins will correct in the coming quarter. Margins are healthy. If I look at part quarters and long-term average, there is very little scope for margins to rise further.”

If one looks at ITC;s shares over the past few months, one can see a surge. ITC shares on Monday hit a new 52-week high of Rs 296.95 apiece after opening at Rs 293 per share. In six months, ITC shares were up by 33 percent.

Prabhudas Lilladher has given a target price of Rs 305 per share. Meanwhile, Centrum Broking has issued a buy call on ITC at a target price of Rs 351 per share.

The paperboards, paper & packaging segment recorded a strong growth of 36 percent in segment revenue and 54.7 percent in segment results. According to Centrum Broking, the paper business was driven by value-addition, and packaging paper grew 50 percent each by volume and value.

First Published:Jul 11, 2022 6:20 PM IST