Stock prices of select paper companies like West Coast Paper Mills, Tamil Nadu Newsprint, Star Paper Mills and Ruchira Papers hit fresh 52-week highs today on the National Stock Exchange. These stocks have gained 30-77 per cent in the last one year. The main interest in these stocks is due to value buying opportunity as many mid and small cap companies rallied in the past one year.

While benchmark Nifty 50 has gained 8.6 per cent year to date, Nifty 500 has outperformed with 9.5 per cent return. Companies like Ballarpur Industries, International Paper APPM and Tamil Nadu Newsprint and Papers are part of Nifty 500 index.

Another reason is there are hardly any good paper stocks including frontline ones or they are expensive. For example, outlook on Ballarpur Industries, largest paper manufacturer, is not good.

Fitch Ratings recently downgraded the long-term issuer default ratings of the company to 'B-', from 'B+' and placed the ratings on Rating Watch Negative (RWN). According to the rating agency, Ballarpur continues to face the twin challenges of high leverage and weak liquidity.

International Paper APPM’s revenue came in flat in FY16 and the company has weakest operating margin among frontline players. Stock prices of Ballarpur and International Paper are down 17 per cent and 21 per cent respectively in the last one year.

Demand for paper has been mirroring the growth in India’s gross domestic product and has been more than supply according to Centrum Wealth Research. “From FY12-15 domestic demand register a CAGR of 8 per cent as compared to a 6 per cent increase in production. The operating capacity of the industry currently stands at around 13 MT. During 2015-16, domestic production is estimated to be 12.2 MT,” said Abdulkader Puranwala and Siddhartha Khemka from Centrum Wealth Research.

West Coast and Tamil Nadu Newsprint are better bets in the paper space due to good margins and comfortable interest coverage ratio despite slightly higher debt to equity ratio in the range of 1.5-1.7 times.

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